NAME: KESHAV SARAOGI

TOPIC: ROLE OF STATUTORY AUDITOR IN CORPORATE SCAMS

SUB-TOPIC: AIG SCAM

ROLL NO.: 508

ROOM NO.: 31

GUIDE: PROF S. S. SAHA

SEMINAR DATE: 02.08.2014

COURSE: B. COM (HONOURS)

INTRODUCTION:

American International Group, Inc. – also known as AIG – is an American multinational insurance corporation. The company operates through three core businesses: AIG Property Casualty, AIG Life and Retirement and United Guaranty Corporation(UGC).

The assignment deals with the scam which unfolded in 2008 when the Federal Government gave AIG a bailout of $85 billion. The auditors of AIG were Pricewaterhouse Coopers which played a crucial role in the scam as a party to the scam. This assignment gives us an insight as to how the auditor deviated from his responsibility of giving a true and fair view by keeping the scam hidden for a long time and reaping benefits for doing so.

OBJECTIVE / METHODOLOGY:

The objective of this project is to study the various corporate scandals and to define the role of auditors in such scandals. We also analyse how it can be prevented by being to those changes within the corporate which indicate probable opportunities of frauds leading to scam.

Several journal and publications were obtained to get a clear picture of what really went wrong. Detailed analysis of the scandal was completed on the basis of the facts obtained and henceforth this project was compiled.

DISCUSSIONS:

The epicentre of the near-collapse of AIG was an office in London. A division of the company, entitled AIG Financial Products (AIGFP), nearly led to the downfall of a pillar of American capitalism. For years, the AIGFP division sold insurance against investments gone awry, such as protection against interest rate changes or other unforeseen economic problems. But in the late 1990s, the AIGFP discovered another new way to make money.

A new financial tool known as a Collateralized Debt Obligation (CDO) became prevalent among large investment banks and other large institutions. CDOs lump various types of debt

- from the very safe to the very risky - into one bundle. The various types of debt are known as tranches. Many large investors holding mortgage-backed securities created CDOs, which included tranches filled with sub-prime loans. AIG faltered in America’s sub-prime mortgage crisis. It had traded heavily in credit default swaps and could not meet its obligations.

PricewaterhouseCoopers LLP (PWC) had been issuing clear audits to AIG for years until accounting problems started rising in the spring of 2005. Even AIG Board’s Audit Committee, which was responsible in supervising the work of PWC, had issued disclaimers regarding the firm’s accounting standard and PWC’s role in performing the outside audits. The disclaimers found their way in Ohio’s attorney general’s security fraud accusations of AIG. The complaints also stated that PWC had known about AIG’s illegal and improper accounting maneuvers but chose to disregard them while issuing false and misleading audit reports. While the attorney generals were waiting to find more details on PWC’s involvement, AIG delayed its 2004 annual report and issued restatement of financial results dating back to 2000. As the result, AIG cut down its net worth by $2.7 billion.

Some analysts criticized PWC for not catching the problem but some believed that PWC was victims of AIG’s changing internal control standards. AIG and PWC’s had decades of relationships. AIG’s former chief Howard Smith himself spent two decades as auditors at PWC before joining AIG. AIG’s new CFO, Steven Bensinger, also started his career in PWC. In the lawsuit filed by Ohio attorney general, PWC’s independence was impaired by the long standing relationship and the $137 Million fees paid from 2000-2003. The fees were for both audit and “tax consulting” services. The suit accused PWC for being on high alert when reviewing AIG’s books and for not noting dubious earning smoothing transactions.

The suit also used AIG’s audit committee’s disclaimers but such statements may not carry significant meanings because audit committees often used similar language to insulate themselves from legal scandals. In a boost to PWC, AIG issued statements to its investors that both the auditor and board were kept in dark of its accounting maneuvers.

The Federal Reserve was the first to jump into the action, issuing a loan to AIG in exchange for 79.9% of the company's equity. The total amount was originally listed at $85 billion and was to be repaid over two years at the LIBOR rate plus 8.5 percentage points. However, since then, terms of the initial deal have been reworked. The Fed and the Treasury Department have loaned even more money to AIG, bringing the total up to an estimated $150 billion. 

CONCLUSION:

AIG's bailout has not come without controversy. Some have criticized whether or not it is appropriate for the government to use taxpayer money to purchase a struggling insurance company. In addition, the use of the public funds to pay out bonuses to AIG's officials has only caused its own uproar. However, others have said that, if successful, the bailout will actually benefit taxpayers due to returns on the government's shares of the company's equity.

No matter the issue, one thing is clear. AIG's involvement in the financial crisis was important to the world's economy. Whether the government's actions will completely heal the wounds or will merely act as a bandage remedy remains to be seen.

REFERENCES:

The information has been sourced from the following websites:

www.wikipedia.org www.investopedia.com http://articles.economictimes.indiatimes.com www.ibnlive.in www.online.wsj.com

(Signature)