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Body and Soul
Posted by Tim Reason | | US
March 22, 2005 12:37 PM ET
AIG fired its CFO, Howard I. Smith, and another executive yesterday after both indicated they would invoke their Fifth Amendment rights in the multiple regulatory investigations into the company's accounting for certain re-insurance transactions.

According to a company spokesman quoted in the The Wall Street Journal, both men "were terminated pursuant to company policy that requires employees to cooperate with government authorities on matters pertaining to the company."

I just wrote a story on a fundamental issue this raises. Too bad it's currently on a press somewhere in Kentucky. So here's a sneak preview: In a feature story ("The Limits of Mercy") in our upcoming April issue, I examine the SEC's policy of extending some degree of leniency to companies that cooperate with investigations. The Department of Justice has a similar policy.

With no body to jail, no soul to damn, but a stock price in jeopardy, corporations have every reason to cooperate as fully as possible with regulators. (The fact that corporations don't always do so underscores the fact that they also have no brains—and depend on the thinking of people whose motives are often mixed). But for Howard I. Smith and other executives, who only need pick up a paper to know that both agencies are also aggressively pursuing individuals for corporate wrongdoing, taking the Fifth is a no-brainer.

Firing him is also a no-brainer—innocent or not, he cannot choose silence for himself and continue to exercise his fiduciary responsibility to a company whose best course lies in full cooperation with regulators.

Without his lawyers in the room, Smith would presumably argue that the transactions in question were legitimate. We'll see what investigators say about that—on its face, this hardly seems to be a run-of-the-mill difference of opinion on accounting treatment. But one has to wonder if Smith's departure will become a run-of-the-mill for CFOs any time an accounting transaction prompts a formal SEC inquiry. At that level, the personal stakes of an accounting debate are astronomically high for a CFO. And, of course, where there's smoke. . .

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