1 An eight month investigation by OFHEO concluded that slack standards
1. An eight-month investigation by OFHEO concluded that slack standards at Fannie Mae created a corporate culture “that emphasized stable earnings at the expense of accurate financial disclosures.” What is wrong with having stable earnings over time? Answer this question with respect to stakeholder interests.
2. Fannie Mae’s corporate governance system failed to identify excessive risk-taking. Describe those risks and the mechanisms that should have been used by Fannie Mae and KPMG to enhance risk assessment. To what extent do you think the risk-taking at Fannie Mae was due to “moral hazard?”
3. According to the case, KPMG failed to review Fannie Mae’s significant accounting policies for GAAP compliance. One item in particular was the failure of Fannie Mae to make a quantitative estimate of losses on its loan portfolio. In the end, KPMG gave an unqualified (now unmodified) opinion even though the financial statements contained significant departures from GAAP. What ethical and professional standards did KPMG violate in taking that position?

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