By Joseph Weber Charging that auditing giant PricewaterhouseCoopers "recklessly or intentionally" certified inaccurate financial statements for American International Group (AIG) since 1999, Ohio Attorney General Jim Petro has added the auditor as a defendant to a class-action lawsuit he has brought against AIG on behalf of a group of shareholders. The damages, though unspecified, could run into the billions.
BusinessWeek Online first reported on Mar. 30 that questions were arising about PwC's role in AIG's problems. The Web site said then that the shareholders were considering adding the auditing firm as a defendant in the class-action suit (see BW Online, 3/30/05, "AIG's Auditor May Be Next").
Petro has taken a leading role in the case because a federal court in New York designated three Ohio state pension funds as lead plaintiffs, and he represents them. They have lost millions of dollars as AIG's stock has plunged by nearly a third since last year, when New York Attorney General Eliot Spitzer began probing dealings by the insurance giant.
TOO CLOSE FOR COMFORT? The lawsuit is likely to revive a debate in industry circles about whether auditors who reap hefty fees from clients in relationships that sometimes last decades can remain objective. The question was hotly debated a few years ago, when auditors such as the defunct Arthur Andersen firm were involved in scandals with Enron and other companies. Some reforms have since been implemented, but they fell short of requiring auditing firms to rotate out of client companies every few years to assure fresh scrutiny.
Petro's amended complaint, filed on Apr. 19, claims that AIG's standing as one of PwC's biggest and most lucrative clients -- it paid some $136.6 million for services between 2000 and 2003 alone -- compromised the close scrutiny the auditor was expected to exercise. "PwC's receipt of substantial audit and non-audit fees impaired its independence and objectivity," the suit says.
PwC declined comment on Apr. 20, saying it had not yet seen the amended lawsuit. Sources close to the matter have said it has cooperated with investigators for such regulators as New York's Spitzer.
ON THE SPOT. AIG executives, who launched an internal investigation after Spitzer began probing suspected improprieties, have admitted there were accounting problems at AIG. They have ousted several executives, and former CEO Maurice "Hank" Greenberg quit in the wake of the investigations. The lawsuit, which also names Greenberg as a defendant, baldly calls the problems "fraud." AIG declined comment for this story beyond its Mar. 30 statement in which it said there were accounting problems. Greenberg could not be reached for comment for this story.
The suit suggests that PwC should have known of AIG's admitted dubious dealings. It argues that personnel from the auditor were "regularly present" at AIG's New York headquarters. The firm, it says, "had continual access to, and knowledge of, AIG's internal and confidential financial and business information through conversations with AIG employees and management and through review of AIG's nonpublic documents."
Furthermore, the suit charges that PwC repeatedly, since 1999, signed off on AIG's financial reports, which have since proved to be "materially false and misleading." Last month, AIG delayed the filing of its annual Form 10K financial report while internal investigators reviewed its records. AIG said it could not determine the effects of any adjustments it might have to make for the past year or years earlier.
WARREN'S WAY. AIG did admit that there was "improper" documentation involved in two transactions with Berkshire Hathaway's (BRK.A) General Re Corp. The transactions -- involving the transfer of $500 million worth of claims and premiums in two parts, in December, 2000, and March, 2001 -- should not have been recorded as insurance, AIG admitted. And it said the company's financial statements would be adjusted to show the money as deposits, not premiums, a change that would reduce the company's reserves.
The Ohio Attorney General's complaint also added Gen Re as a defendant. A spokesman for Gen Re declined comment on the move. Investment guru Warren Buffett, who heads Berkshire Hathaway, has been cooperating with investigators in the case. Greenberg so far has declined to answer investigators' questions, saying he needed more time to study the facts.
The class-action suit almost certainly won't be the last shoe to drop in the affair. Along with continuing regulatory scrutiny, other shareholder groups are pressing to recoup losses suffered as a result of AIG's stock plunging 32%.
RENEWED QUESTIONS. California State Treasurer Phil Angelides, for instance, on Apr. 12 teamed up with the president of the board of the California Public Employees' Retirement System, to ask the full CalPERS board to "take all possible steps, including legal action, to recover any losses suffered by the fund and California taxpayers as a result of improper corporate behavior at AIG or the company's auditor, PricewaterhouseCoopers." A CalPERS spokesman said the issue is under study.
Whether or not PwC is found to be culpable in the AIG affair, the case seems likely to revive questions about how auditors do their business. In recent years, lawmakers and the accounting industry's standard-setters have moved to resolve such questions by barring auditors from collecting both audit and non-audit consulting fees from the same client, among other measures.
The profession remains resistant to suggestions that auditing firms be required to rotate among clients, however. And with only four global giant auditing firms surviving to serve equally global clients, such moves could be problematic, even as the lawsuit against PwC renews the debate over how auditing firms can best maintain their professional neutrality in long-term relationships. Weber is BusinessWeek's Chicago bureau chief