Risk Management

Former PNC Finance Exec, Auditor Settle

The SEC had charged that the financial services company tried to remove loans and venture capital investments from its financial statements by tran...
Stephen TaubDecember 12, 2006

A former finance executive of PNC Financial Services Group and the company’s former auditor both settled Securities and Exchange Commission charges stemming from an arrangement with American International Group that enabled PNC to keep $762 million in liabilities off its balance sheet.

The SEC had charged Thomas Garbe, the ex-head of PNC’s accounting policy department, with spurring PNC to violate reporting and recordkeeping provisions of federal securities laws. Under the settlement, he was ordered to cease and desist from causing future violations.

The commission also had alleged that Michael Joseph, a partner in the national office of Ernst & Young, with violated auditor-independence standards and causing violations by PNC of antifraud, reporting, and recordkeeping provisions of the federal securities laws. Joseph’s settlement bars him from appearing or practicing before SEC as an accountant, although he has a right to apply for reinstatement after three years.

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Under the terms of the agreement, Garbe and Joseph neither admitted nor denied the commission’s charges, according to the Associated Press. The SEC charged that in 2001, PNC tried to remove certain loans and venture capital investments from its financial statements by transferring them to certain special-purpose vehicles, known as PAGIC entities, that were especially created by AIG to receive those assets.

The Commission alleged that PNC didn’t consolidate the PAGIC entities in its financial statements filed for the second and third quarters of 2001 and that the accounting for the PAGIC entities was “improper under generally accepted accounting principles.” The SEC also accused PNC of making inaccurate statements about its financial condition and performance, including, among other things, “a material overstatement” of its 2001 earnings.

In its complaint, the SEC asserted that Garbe was responsible for making sure that PNC’s accounting for the PAGIC entities conformed with GAAP. In explaining why Garbe was charged, the commission alleged that throughout the period at issue, he received information that should have prompted him to look further to find out if certain features of the transactions made PNC’s non-consolidation of the entities improper under GAAP.

The commission also found that Garbe “failed to adequately inquire whether the fees paid to AIG reduced AIG’s investments in the special purpose entities below the point at which nonconsolidation would be appropriate under GAAP,” according to the complaint. The SEC also found that Garbe “should have known” that PNC’s non-consolidation of the PAGIC entities didn’t comply with GAAP.

According to the commission, Joseph helped develop and market the accounting product for AIG and should have known that PNC’s accounting for the special purpose entity did not conform with GAAP and would result in materially misleading filings by PNC.

Joseph was thus “a cause” of PNC’s violations of antifraud, reporting, and recordkeeping provisions of the federal securities laws, the SEC charged. By advising PNC on the appropriateness of the accounting for the product that he had helped AIG develop and market, the commission alleged that Joseph “compromised his and his firm’s auditor independence” required by GAAP standards.