In October 2003, about 2 weeks after releasing their third quarter earnings figures, Fannie Mae had to restate their unrealised gains by $1.2 billion. This was apparently the result of “honest mistakes made in a spreadsheet used in the implementation of a new accounting standard.” Honest mistake or not, $1.2 billion is a lot of money: more than the $70 million of Provident Financial in March, or the $24 million lost by TransAlta in June. It’s reasonably common to see errors of half a million or so, but they don’t usually make the headlines.
Apparently Fannie Mae picked up the error as part of the normal processes of preparing their financial statements for filing. Presumably they failed to pick it up as part of their review process before issuing the earnings statement. They claim that the event demonstrates that their accounting processes and controls work as they should.
Better late than never, I suppose, but I can’t help thinking that their processes and controls should have picked up the problem at an earlier stage. We don’t know whether the mistake was in the model or the implementation (ie, whether they had understood the accounting standard correctly but had made a mistake in the implementation of that understanding, or whether they had misunderstood the new accounting standard). It’s entirely possible that their reviewing processes don’t separate the two issues, thus making it harder to find either kind of mistake.
Let me know if you’d like any of your spreadsheets reviewed, or if you are not sure that your processes and controls are as effective as Fannie Mae’s. Fannie Mae apparently continue to be proud of theirs, so self-confidence isn’t necessarily a foolproof guide.
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