The "It's Your Fault I Was Wrong" Defense

Remember the Enron-era joke about how E.B.I.T.D.A. stands for "Earnings Before I Tricked the Dumb Auditor?"

Well, it turns out KPMG took it literally.

KPMG, Fannie Mae's former auditor, is suing the lender for "fraudulent deception" that prevented it from uncovering $6.3 billion worth of inflated earnings, Bloomberg News reports. The auditor signed off on Fannie Mae's books from 1998 until 2004, when it was promptly fired after the Securities and Exchange Commission accused Fannie of using accounting tricks to smooth earnings.

In its lawsuit, KPMG says Fannie Mae failed "to disclose information to KPMG that was vital to KPMG's ability to perform audits and quarterly reviews."

It "repeatedly, systematically, and intentionally misled KPMG." The amount of damages is to be determined at trial.

This comes in response to a lawsuit filed by Fannie Mae in December that places the blame squarely on the auditors for the overstated earnings, calling it "accounting malpractice." Fannie says the accounting errors led to $1 billion in costs. The company is the biggest source of money for home loans.

This may just be the beginning of an ugly fight with armies of well-paid attorneys on both sides. But we're pretty sure that all of those homeowners on the brink of defaulting on their mortgages would rather they just leave this nasty spat where it lies. In the past.

by Megan Barnett