WASHINGTON - The much-awaited report by former U.S. Sen. Warren Rudman and Paul, Weiss, Rifkind, Warton & Garrison LLP commissioned by the special review committee of the board of Fannie Mae of an independent investigation of the issues raised in the Office of Federal Housing Enterprise Oversight's special examination of Fannie Mae was finally released last month and features several sharp criticisms of the housing government sponsored enterprise. But while the findings point the finger of blame at many facets of Fannie Mae's operations that lead up to and contributed to the OFHEO's investigation of Fannie Mae's accounting practices, the report's findings were tempered by its acknowledgement of the "extensive transformation both in personnel and structure" Fannie Mae has undergone since September 2004 that has resulted in "a dramatic shift in both the `tone at the top' and the Company's internal organization." The OFHEO's investigation and eventual 2004 report, of course, were triggered by concerns former Fannie Mae employee Roger Barnes had expressed concerning Fannie Mae's accounting practices. According to the Rudman report, the OFHEO found Fannie Mae's accounting practices were not consistent with generally accepted accounting principles and were motivated by management's desire to portray Fannie Mae "as a consistent generator of stable and growing earnings," and by an "executive compensation structure that rewarded management for meeting goals tied to earnings-per-share, a metric subject to manipulation by management." The OFHEO's report also concluded that Fannie Mae had "dysfunctional accounting policy development, key person dependencies, and poor segregation of duties" that contributed to accounting failures and safety and soundness problems. The OFHEO's investigation eventually culminated in the retirement of Fannie Mae CEO and Chairman Franklin Raines and the resignation of Chief Financial Officer J. Timothy Howard. There were several other changes in top management positions as well. The Justice Department and Securities and Exchange Commission also announced their own separate investigations of Fannie Mae. Concerning Fannie Mae's response to Barne's allegations, the Rudman report concluded that it was "flawed" in several areas: * "The "Controller's Office did not communicate appropriately with Barnes regarding either accounting or personnel matters. The remedial measures Fannie Mae directed the Controller's Office to undertake following the investigations into Barne's allegations were not effective in improving the reporting environment within the Controller's Office. The Company's investigation into Barne's allegations also suffered from conflicts-of-interest and inappropriate pressure to complete the investigations in an unreasonable time frame due to looming CEO/CFO certification deadlines. In addition, the Legal Department assigned to Internal Audit the task of assessing whether the accounting practices Barnes identified violated GAAP, but Internal Audit was not equipped to render such determinations. The Rudman report also concluded that Barne's underlying allegations of accounting problems "had merit." As for Fannie Mae's accounting practices, internal controls, corporate governance and structure prior to 2005, the report found that: * Fannie Mae management's accounting practices in almost all of the areas reviewed were not consistent with GAAP, "and, in many instances, management was aware of the departures from GAAP. Management often justified departures from GAAP based upon materiality assessments that were not comprehensive, the need to accommodate systems inadequacies, the unique nature of Fannie Mae's business, or "substance over form" arguments. * Except for one instance in connection with the 1998 financial statements, "there was no evidence that supported the conclusion that management's departure from GAAP was motivated by a desire to maximize bonuses in a given period." However, the report did find "evidence amply supporting the conclusion that management's adoption of certain accounting policies and financial reporting procedures was motivated by a desire to show stable earnings growth, achieve forecasted earnings, and avoid income statement volatility." * Fannie Mae employees who worked at critical accounting, financial reporting, and audit functions "were either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly. This deficiency was most clearly manifested by employees who occupied senior positions in the Office of the Controller and the Office of Auditing. In addition, the resources devoted to accounting, financial reporting, and audit functions were not sufficient to address the needs of an institutions as large and complex as Fannie Mae." * The information management provided to the board regarding accounting, financial reporting, and internal audit issues "generally was incomplete and at times, misleading. Management tightly controlled the information flow to the Board generally, and Howard, in particular, filtered the accounting and financial information the Board received." * The company's accounting systems were "grossly inadequate." * Howard, and former Controller Leanne Spencer, "were primarily responsible for adopting or implementing accounting practices that departed from GAAP, and that they put undue emphasis on avoiding earnings volatility and meeting EPS targets and growth expectations." [email protected]