Risk Management

Regulators Eye Berkshire Hathaway Accounting

Quarterly filing discloses that governmental authorities are inquiring about ''the accounting by certain of Berkshire's insurance subsidiaries for ...
Stephen TaubAugust 8, 2005

Berkshire Hathaway has announced that regulators are looking into accounting issues related to certain reinsurance transactions.

The conglomerate controlled by legendary investor Warren Buffett disclosed in its quarterly earnings filing that governmental authorities are inquiring about “the accounting by certain of Berkshire’s insurance subsidiaries for assumed and ceded finite transactions.”

Berkshire added that regulators are also reviewing the role of its General Re insurance company and its subsidiaries, as well as that of their counterparties, in a transaction with American International Group Inc. and in assumed finite transactions, “including whether General Re or its subsidiaries conspired with others to misstate counterparty financial statements or aided and abetted such misstatements by the counterparties.”

The filing shocked many individuals who have known Buffett and have followed his career. “It is inconceivable to me that Buffett would have allowed any improper accounting,” Keith Trauner of Fairholme Capital Management told Bloomberg. “I’m sure it pains him, but the ultimate end of this is unlikely to have a material effect on Berkshire.”

“Berkshire Hathaway has always been viewed as a company that’s above the fray and operates on a higher level,” Christopher Bebel, a former federal prosecutor and now a private lawyer, told the wire service. “This suggests there could be significant storm clouds on the horizon.”

Berkshire also disclosed in the filing that in late July it terminated Milan Vukelic, chief executive officer of Faraday Group, an affiliate of General Reinsurance. Vukelic, who previously served as the head of General Re’s international finite business unit, had been on paid leave since May.

In December 2004, the Financial Services Authority announced that it was investigating Vukelic regarding certain transactions in 1998. In April, the FSA advised General Re that it was investigating Vukelic and a former officer of Cologne Reinsurance Co. (Dublin) Ltd. with respect to certain finite risk reinsurance transactions, including transactions between Cologne and several other insurers

The FSA also requested that General Re’s U.K.-based affiliates provide information relating to these transactions. Berkshire announced that General Re and its affiliates are cooperating fully with the FSA in these matters.