AIG's Auditor May Be Next
By Joseph Weber
Federal and state regulators continue to turn up the heat on American International Group (AIG ), felling several executives from CEO Maurice "Hank" Greenberg on down. Now the outfit's longtime auditor -- PricewaterhouseCoopers -- may begin to feel some of the pressure. The auditing firm, a well-regarded leader in accounting for insurance companies, is likely to come under scrutiny from regulators and aggrieved shareholders alike for its oversight at the embattled outfit, say outside accounting and legal experts.
Institutional shareholders who have brought suit against AIG in the wake of a 20% plunge in its stock since September are said to be considering bringing the auditing firm into a pending class action. "Auditors are almost as a matter of course looked at and scrutinized when the issues involved in the case involve accounting and how certain transactions are being accounted for," says Christopher J. Keller, a partner at Goodkind Labaton Rudoff & Sucharow, a New York law firm hired by the Ohio State attorney general to represent three big Ohio pension funds that have lost tens of millions of dollars on their AIG holdings in a class action.
REALLY A LOAN?
PricewaterhouseCoopers, whose ongoing relation with AIG stretches back many years, was the insurance giant's auditor in 2000, when a major transaction that investigators are now probing took place. Just how much scrutiny PwC gave the deal will be an issue that investigators are likely to study, outsiders and a person close to the probe tell BusinessWeek Online.
In the deal, Berkshire Hathaway's (BRK.A ) General Re insurance unit moved some $500 million of claims over to AIG along with $500 million of premiums -- which may have effectively boosted AIG's reserves and revenue without similarly hiking its risk. Investigators for the Securities & Exchange Commission and New York State Attorney General Eliot Spitzer are now questioning whether that deal amounted to a loan, not insurance, and thus gave investors an inflated picture of AIG's financial standing.
If such transactions -- or others that regulators are probing -- turn out to have been improper, the spotlight is likely to turn to PwC's auditing work. Industry rules require that the auditor verify whether there's risk transfer in such deals before certifying the financial statements, says Andrew J. Barile, an insurance consultant from Rancho Santa Fe, Calif. "I'd be very surprised if they didn't have to sign off" on the transactions, he adds. PwC officials declined comment on its potential liability or any of the AIG accounting issues.
NO CHARGES FILED.
Other outsiders maintain that the auditing firm should have raised a red flag about such deals. From what he says he knows about it, "the transaction really doesn't pass the smell test," says J. Edward Ketz, an associate professor of accounting at Pennsylvania State University. "It's something you should be very suspicious of." Howard M. Schilit, founder of the Center for Financial Research & Analysis in Rockville, Md., adds that investors expect the auditors to be their protectors and that PwC "most definitely" faces headaches if it signed off on dubious financial deals.
PwC might not get much help, moreover, from at least some of AIG's directors. As reported by industry newsletter Schiff's Insurance Observer in July, 2002, the board's audit committee appeared to back away from support of AIG's accounting practices in reports about 2000 and 2001, when some of the questionable transactions occurred. The committee reported that its own oversight did "not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls..."
At this point the investigation is continuing, and no charges of wrongdoing have been filed against AIG. Even being named as a co-defendant in an AIG lawsuit doesn't mean PwC has done anything wrong. Still, being implicated in a high-profile legal case nearly always involves big legal costs and negative publicity. Under the strictest legal standard, the plaintiffs would have to prove that the auditor was a primary participant in a fraud, says Lawrence A. Cunningham, a professor of law and accounting at Boston College. Under a lesser standard that could apply if PwC signed off on any recent securities offering for AIG, only negligence in the firm's audit might have to be proven.
And at AIG, the damage is mounting. Greenberg decided to step down first as CEO and then as chairman, as well. Three other executives, including Chief Financial Officer Howard Smith, have been fired for failing to cooperate with investigators. And there are worries Greenberg's successor as CEO could be pulled into the fray (see BW Online, 3/29/05, "Will AIG's Sullivan Survive?"). The tumult suggests that AIG's troubles and that of outfits associated with it, such as PwC, are just beginning.
Weber is BusinessWeek's Chicago bureau chief
Edited by Beth Belton