© D.L. Crumbley
Wrong Way Earnings Management
Freddie Mac understated past earnings as much as $5 billion.
Certain transactions and accounting policies were “implemented with a view to their effect on earnings” (e.g., to smooth earnings).
Restatements will result in higher earnings in prior periods but lower earnings in future periods.
Employees appeared to knowingly violate accounting rules in an effort to manipulate earnings.
Source: Patrick Barta and J.D. McKinnon, “Freddie Mac Profits May Have Been Low By Up to $4.5 Billion,” Wall Street J., June 26, 2003, pp. C-1 and C-11.