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:

INTRODUCTION:

B. COM (HONOURS)

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
scandals and to define
analyse how it can be
the corporate which
leading to scam.

project is to study the various corporate

the role of auditors in such scandals. We also
prevented by being to those changes within
indicate probable opportunities of frauds

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 Americas subprime 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 Boards Audit Committee, which was
responsible in supervising the work of PWC, had issued disclaimers
regarding the firms accounting standard and PWCs role in
performing the outside audits. The disclaimers found their way in
Ohios attorney generals security fraud accusations of AIG. The
complaints also stated that PWC had known about AIGs 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 PWCs 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 AIGs changing internal control
standards. AIG and PWCs had decades of relationships. AIGs
former chief Howard Smith himself spent two decades as auditors at
PWC before joining AIG. AIGs new CFO, Steven Bensinger, also
started his career in PWC. In the lawsuit filed by Ohio attorney
general, PWCs 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 AIGs books
and for not noting dubious earning smoothing transactions.
The suit also used AIGs audit committees 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)