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AIG points of finger of blame after $2.7bn restatement

Embattled insurance giant AIG has pointed the figure at its former management for contributing to a mountain of accounting errors and “inappropriate transactions” that over-stated its book value by some $2.7bn.

After failing to make its delayed 30 April deadline to publish its 10-K filing with the Securities & Exchange Commission (SEC), the insurer revealed on 1 May that it will now restate four years of financial reports because of a long-list of financial transactions that “appear to have had the purpose of achieving an accounting result that would enhance measures important to the financial community.”

But after a week of fevered speculation that AIG was primed to reveal an ever-larger deficit in its financials, relieved shareholders sent the insurer’s share price up 5.09 percent to $53.44 on 2 May.

In a long statement, the insurer said that as a result of its internal review it had identified certain “control deficiencies” including “the ability of certain former members of senior management to circumvent internal controls over financial reporting”.

AIG was dominated by the patriarchal Maurice “Hank” Greenberg for over thirty years until his effective ousting in March. Other senior executives to leave the organisation recently in response to the regulatory investigations that surround the company include chief financial officer Howard J Smith and head of reinsurance buying Christian Milton.

In the light of these deficiencies, the company said its auditor PricewaterhouseCoopers would issue an adverse opinion about AIG’s internal controls. The insurer added, however, that it expects to receive “unqualified audit opinions from PwC with respect to its consolidated financial statements and its internal control assessment process”.

Last week, the company’s spokesman Chris Winans was forced to deny suggestions in The Times that the company’s 10-K was being delayed because of a fear of reprisals over the tough Sarbanes-Oxley law.

A Merrill Lynch & Co research note called the unqualified audit opinion “a new positive,” adding, “we expect further issues, if any, to be manageable.”  

In its 10-page statement, AIG explained that the $2.7bn reduction in shareholders’ equity would include $2bn of accounting errors while estimates for increased tax bills and deferred acquisition costs would add a further $700mn. In all, the reduction is the equivalent of 3.3 percent in the firm’s $82.87bn shareholders’ equity at 31 December 2004.

These errors include reinsurance ceded to Union Excess Reinsurance Company Ltd that contained insufficient risk transfer to be accounted for as insurance. The company also admitted that Union Excess should be included in AIG’s consolidated financial statements as a “result of certain facts and circumstances... that were not properly reflected in AIG’s books and records, were not known to all relevant AIG financial reporting personnel and which AIG now believes were not known to AIG’s independent auditors”.

In all, explained the company, a failure to properly account for risk transfer will decrease shareholders’ equity by around $1.2bn. This includes the controversial $500mn finite reinsurance contract with General Re that caught the eye of US regulators earlier this year.

Other improprieties included a failure to properly account for hedge fund investments, the improper characterisation of auto warranty losses as capital losses with a Barbados domiciled reinsurer Capco Reinsurance Company and the incorrect accounting for viatical settlements that artificially increased AIG’s stated assets by $100mn.

The company explained that it now expects to file its 10-K by no later than the 31 May.

In the statement, Greenberg’s successor Martin Sullivan explained: “We are disappointed that we have not yet been able to file our Form 10-K. We are working diligently to complete the filing, at the same time assuring we have accurate financial statements, rigorous accounting, greater transparency, and thorough disclosure. We know how difficult these past several months have been for those who put their trust in AIG.”

He continued: “We now know that there were serious issues with our internal controls, and that it is necessary for us to address those issues and strengthen our controls. We are taking actions that will enable AIG to reinforce its credibility and the trust and confidence of our stakeholders.”

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