write a paper about the Freddie Mac Scandal with APA style 7 reference
The correct answer and explanation is:
iturn0image0turn0image2turn0image4turn0image5The Freddie Mac Accounting Scandal: An Overview
In 2003, the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, became embroiled in a significant accounting scandal that revealed the manipulation of financial statements to misrepresent the company’s earnings. This misconduct not only led to substantial financial penalties but also undermined investor confidence and prompted calls for enhanced regulatory oversight.
Background
Established by Congress in 1970, Freddie Mac’s mission was to expand the secondary mortgage market by purchasing mortgages from lenders, thereby increasing liquidity and encouraging homeownership. As a government-sponsored enterprise (GSE), it played a pivotal role in the U.S. housing finance system.
The Scandal Unfolds
In June 2003, Freddie Mac disclosed that it had misstated its earnings by approximately $5 billion for the years 2000 through 2002. The misstatements were primarily due to the company’s efforts to smooth earnings and present a facade of steady profitability, aligning with the expectations of analysts and investors. This involved complex accounting maneuvers, including improper hedge accounting techniques, to defer earnings to future periods. The revelation led to the dismissal of several top executives, including the president, chief financial officer, and chief operating officer.
Regulatory Actions and Penalties
The Securities and Exchange Commission (SEC) launched an investigation into Freddie Mac’s accounting practices. In December 2003, the company agreed to a $125 million settlement with the Office of Federal Housing Enterprise Oversight. Subsequently, in September 2007, Freddie Mac consented to a $50 million penalty to settle SEC charges related to the accounting fraud, without admitting or denying the allegations citeturn0search1. Additionally, four former executives faced civil fines and restitution payments for their roles in the misconduct.
Implications and Reforms
The Freddie Mac scandal highlighted significant weaknesses in corporate governance and internal controls within GSEs. It underscored the necessity for stringent regulatory oversight and transparency in financial reporting. In response, legislative measures were introduced to bolster the regulatory framework governing GSEs, aiming to prevent similar occurrences in the future. Furthermore, the scandal served as a cautionary tale about the perils of prioritizing market expectations over accurate financial disclosure.
Conclusion
The 2003 Freddie Mac accounting scandal serves as a critical example of the consequences that arise from financial misrepresentation. It emphasizes the importance of ethical practices, robust internal controls, and the need for comprehensive oversight in maintaining the integrity of financial institutions and safeguarding investor trust.
