Corporate Finance AIG Accounting Scandal Explained December 8th, 2012

2394 Words May 26th, 2013 10 Pages
Corporate Finance AIG Accounting Scandal Explained December 8th, 2012 ________________________________________________________________________________ On February 9th, 2006, the SEC and the Justice Department settled with AIG for an amount in excess of $1.6B related to alleged improper accounting, bid rigging (defined by Investopedia as a scheme in which businesses collude so that a competing business can secure a contract for goods or services at a pre-determined price), and practices involving workers compensation funds. Both the CEO and CFO of AIG were replaced amidst the scandal. This closure ended a 5-year period, beginning in 2001, which tarnished the 80-year old institution’s reputation that had become the world’s largest …show more content…
Some have attempted to use this case as an example to SOX’s failure to overhaul corporate accounting practices. However, in AIG 's first report mandated by the Sarbanes Oxley Act of 2002, a number of material weaknesses in control were disclosed, emphasizing that the first and most extensive weakness was in the ethical culture of AIG or its control environment. The report states verbatim "Certain of AIG 's controls within its control environment were not effective to prevent certain members of senior management, including the former Chief Executive Officer and former Chief Financial Officer, from having the ability, which in certain instances was utilized, to override certain controls and effect certain transactions and accounting entries. In certain of these instances, such transactions and accounting entries appear to have been largely motivated to achieve desired accounting results and were not properly accounted for in accordance with GAAP." (McGee, S., 2005) Specific overrides noted resulted in (1) creation of a special purpose entity to improperly convert underwriting losses to investment losses, (2) improper recording of reinsurance transactions, (3) improper "top level" adjustments and covered call transactions, and (4) unsupported "top level" adjustment of loss reserves. (Knowledge@Wharton, 2005) "Leadership is the capacity and will to rally men and women to a common purpose and the character which inspires confidence." – Bernard Montgomery
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