As a part of a management shakeup, Fannie Mae decided late last week to fire KPMG LLP as its outside auditor after 35 years of service because its financial statements from 2001 through mid-2004 can “no longer should be relied upon.”
Oh well, announcements of accounting scandals are no longer any big deal in this post-Enron era where auditors are viewed by many as business cops that go on the take to cover up financial improprieties when they get too cozy with a client’s management.
However, what is not as widely reported is that Fannie Mae’s decision to dismiss KPMG is providing a glimpse of the big accounting firms’ increasingly precarious state of affairs. Indeed, with the firing of KPMG, it is not at all clear which big accounting firm is in a position to take on Fannie Mae as a client.
For all practical purposes, of the Big Four accounting firms — KPMG, Deloitte Touche Tohmatsu, Ernst & Young LLP and PricewaterhouseCoopers — Fannie Mae is left with essentially two choices: Deloitte & Touche LLP and PricewaterhouseCoopers.
Ernst & Young likely will not be the choice because it has already been advising Fannie’s audit committee and management in responding to various ongoing government probes. Similarly, Deloitte will not be the choice because it has been advising Fannie Mae’s chief regulator, the Office of Federal Housing Enterprise Oversight‘s (“Ofheo”) examination of Fannie’s accounting practices.
Normally, PricewaterhouseCoopers might be the choice because it does not currently provide any services to Fannie Mae. However, PricewaterhouseCoopers is the auditor for Freddie Mac, for whom it identified numerous accounting violations after replacing the criminalized Arthur Andersen LLP in 2002. Fannie Mae regulator Ofheo might not approve of both major mortgage corporations using PricewaterhouseCoopers as their outside auditor.
Consequently, the Fannie Mae situation highlights one of the largely ignored consequences of the federal government’s dubious decision to prosecute Andersen out of business over its role in the Enron accounting scandal: There are simply not enough big accounting firms left to provide audit services for the big companies that need them. Complicating matters even further is that each of the Big Four are literally under siege from civil lawsuits seeking large damage awards that could cripple any or all of them.
So, we already know that the government’s regulation of Andersen through criminalization of their audit services cost the marketplace thousands of jobs and one of the relatively few accounting firms that could provide the specialized services that big companies need. Now, we are coming to understand that this dubious governmental policy of criminalizing auditors may result in big companies not being able to to find auditors capable of providing adequate audit services at all.
Remember that the next time that you read a Justice Department press release touting its “success” in its prosecution of Andersen in connection with the Enron scandal.

On Dec. 31, Larry Kellner — Houston-based Continental Airlines‘ president and chief operating officer — will take over as chief executive of Continental, replacing 63-year-old CEO Gordon Bethune, the former mechanic who pulled Continental from the brink of what would have been its third bankruptcy a decade ago.
This Wall Street Journal ($) article profiles Mr. Kellner and Continental, which is the nation’s fifth-largest airline with revenues of $8.87 billion over the past year. It is a good introduction to the new CEO of one of Houston’s largest employers. Check it out.