Business Finance
Fannie Mae Discussion forum

Question Description

Please carefully read before answering questions:

There are two discussion forums in the attachment that were answered by students to this question.

"In the mid-2000s Fannie Mae was in severe financial difficulty and desperately needed additional capital for the company to survive. What factors prevented Fannie Mae from simply providing potential lenders with misleading financial statements to make the company look like a risk-free investment?"

You will not be answering the above question. However, you will be answering to both of the responses made by two of your classmates. Start with reading the first forum, then respond in about 100 words. Then, read the second forum, and respond in about 100 words.





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There are two discussion forums below that were answered by students to this question. "In the mid-2000s Fannie Mae was in severe financial difficulty and desperately needed additional capital for the company to survive. What factors prevented Fannie Mae from simply providing potential lenders with misleading financial statements to make the company look like a risk-free investment?" You will not be answering the above question. However, you will be answering to both of the responses made by two of your classmates, which are in relation to the above question. Start with reading the first forum, then respond in about 100 words. Then, read the second forum, and respond in about 100 words. Discussion forum 1: There are many contributing factors that would prevent Fannie Mae from providing misleading information to make the company appear more appealing to potential lenders. Giving this company the benefit of the doubt, you could begin by believing the company had a strong internal control environment. The management team as well as the company’s personnel would stand by the integrity and moral values of the company which would lead them to only provide accurate information. Aside from following honest ethics, other components of this control environment would play a role as well. “The control environment is particularly important because fraudulent financial reporting often results from an ineffective control environment.” (Williams, et al., 2012, pg. 8) Another factor that would be a bit firmer than believing the company has good moral value, would be the Sarbanes-Oxley Act of 2002 signed by President George W. Bush. Also known as SOX, this act requires all public companies to submit a yearly report proving that they have an effective financial system. “In essence, management must indicate whether the entity’s internal control system provides reasonable assurance that financial statements will be prepared in accordance with the laws and regulations governing financial reporting.” (Williams, et al., 2012, pg. 9) This report is then reviewed by an external auditor who provides his or her own report regarding the company’s control system. This essentially makes it impossible for a company to provide false or misleading information to potential lenders. From either side of the spectrum, weather you are trusting in Fannie Mae to have good honorable conduct or trusting in the SOX Act to provide an accurate report, the two examples would make it difficult for a company to provide deceptive information regarding their financial system to any persons interested in becoming a potential lender. Reference: Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J. V. (2012). Financial & managerial accounting: the basis for business decisions (16th ed.). New York, NY: McGraw-Hill Irwin Discussion forum 2: The fact that Fannie Mae is a "government-sponsored enterprise" (GSE) created by the United States Congress prevented misleading financial statements from being provided to potential lenders. The purpose of a GSE like Fannie Mae is to be transparent and reduce risk to investors and potential lenders. So, the integrity of providing financial information would be expected and monitored by other United States Government agency such as the Security Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). This would also make it difficult for a public company like Fannie Mae to be able to take shortcuts on producing financials. Another factor that would have made it difficult for Fannie Mae to produce misleading reporting is the Sarbanes-Oxley Act (SOX). This law passed in 2002 requires public companies to produce reports annually to ensure that internal controls for financial reporting are in place and operating effectively. Therefore, the existence of this law was to prevent companies like Fannie Mae from engaging in fraudulent financial activities such as Enron and WorldCom or face major fines and investigations. Williams, J.R., Haka, S.F., Bettner, M.S., Carcello, J.V. (2012). Financial & Managerial Accounting: The Basis for Business Decisions. (16th edition). New York, NY: McGraw-Hill Irwin ...
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