Auditing

PwC Ignored Warnings on AIG: Report

The audit committee of the insurer's board stated in 2001 and 2002 that the committee couldn't independently gauge the soundness of the company's a...
Stephen TaubMay 26, 2005

American International Group’s outside auditor, PricewaterhouseCoopers LLP, overlooked disclaimers from the insurance giant’s audit committee stating that the committee couldn’t vouch for AIG’s accounting, according to The Washington Post.

In 2001 and 2002, the five-member committee of outside directors reported in an annual filing that that the committee’s oversight did “not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles,” the paper reported.

The committee also stated it couldn’t promise that the audit had been performed “according to normal standards or even that PWC was in fact ‘independent,’” according to the Post.

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The paper noted that AIG’s audit committee disclaimer is contained in a 224-page lawsuit filed by Ohio’s attorney general accusing AIG of securities fraud and alleging that PwC disregarded key warning signs.

The complaint reportedly asserts that the Big Four accounting firm knew of or “recklessly disregarded” many “illegal” and “improper” accounting maneuvers. Those moves included the $500 million so-called finite reinsurance transactions with General Re in 2000 and 2001 that are at the heart of current regulatory scrutiny.

The insurance giant’s audit committee included such luminaries as former U.S. trade representative Carla Hills and, in 2002, former National Association of Securities Dealers chairman and chief executive Frank Zarb, the current chairman of AIG.

The paper noted that it’s not unprecedented for an audit committee to issue such caveats. But, Itzhak Sharav, an accounting professor at Columbia University, told the Post: “Their statement, the phrasing, all of it seems to be to get the reader to understand that they’re going out of their way to emphasize the possibility of problems that are undisclosed and undiscovered, and they want no part of it.”

The paper said other companies that included similar disclaimers as those found in AIG’s proxy included Goldman Sachs Group Inc. and Wachovia Corp., as well as WorldCom Inc. and other companies that later ran into trouble.

Lehman Brothers Holdings Inc. and Morgan Stanley were among companies that included milder disclaimers that said committee members relied on management and outside auditors for accurate information, according to the newspaper.

PwC spokesman David Nestor told the Post: “We cannot comment on client matters; however, that sort of proxy language was not uncommon pre-Sarbanes-Oxley [Act] and in fact was then used by many other large companies. Auditors would not have seen this as a ‘red flag’ or a scope limitation, as the board’s proxy language simply described what was and what was not the responsibility of its audit committee at that time. Auditors also would not have been surprised to see that descriptive language change after the passage of the Sarbanes-Oxley Act in 2002.”

Michelle Gatchell, a spokesperson for Ohio Attorney General Jim Petro, told the paper that the office is awaiting “more details about PwC’s involvement” that could emerge when AIG issues its 2004 annual report, which has been delayed three times. The company has promised that it will be filed by May 31.

In other AIG news, New York attorney general Eliot Spitzer and the New York Insurance Department are planning to file a civil suit as early as Thursday against the company, former chairman Maurice Greenberg; and former CFO Howard Smith, according to The New York Times.

The suit would charge those parties with being involved in improper accounting that enabled the insurer to make its financials look stronger than they really were, according to the newspaper.