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Freddie Mac, the firm that buys home mortgages, has been sued by at least twenty investors over falsely understating its past earnings.
In June of 2003, Freddie Mac disclosed that accounting adjustments would need to be made; and its past earnings of 2000 and 2001 would need to be restated upward.
Company spokesmen say “mistakes” were made in accounting reporting, but it appears to be a deliberate effort to present a picture of smooth growth earnings to the public. Allegedly, management has deliberately understated earnings, and put money aside to bolster any future decline in earnings.
While the magnitude of the Freddie Mac problem is not on par with Enron or WorldCom, any failure to accurately report financial information to investors is wrong.
If Freddie Mac were to experience rough waters later on, and its reserve funds were then used to smooth out its earnings reports, the true change in the condition of the company would be concealed and hidden from view for investors.
For example, if 2003 earnings were flat, but were reported to be increased, using the hidden funds to bolster the financial picture, then investors would be pulled in, fraudulently, to buy stock, believing Freddie Mac’s business had improved.
Lawsuits allege the manipulation was to “protect” top management from having to answer any tough questions, in the event that earnings turned down.
As a result of the news of the manipulation, share prices fell about 20% on the disclosure.
The lesson for managers everywhere is accounting needs to be honest and accurate. Any time books are cooked in any way, for any reason, investors are being misled. Keep the books honest, and let the investors make informed decisions. Earnings manipulation in any form, for any reason, is wrong.
Steve Marr is the former CEO of the fourth largest import-export firm in the U.S., a company which facilitated international trade for many of the largest companies in America. Currently, Steve consults with with businesses and ministries utilizing ancient Biblical principles for success in today’s marketplace. Contact Steve, or visit his website at www.businessproverbs.com.