Part 1: Overview
1.1 Timeline of AIG Accounting Scandal
1.2 Relationship Chart of AIG and Its Counterparties
Part 2: Accounting Issues
2.1 Background on Reinsurance and Relevant GAAP Rules
2.2 Manipulation Technique 1
2.3 Manipulation Technique 2
Part 3: Auditing Issues
3.1 Reasons for Auditing Failure
Part 4: Corporate Governance
4.1 Tone at the Top
4.2 Dysfunction of the Board
4.3 Low Engagement of Shareholders
4.4 Reactions and Its Effectiveness?
4.5 Possible Therapy
Part 5: Recommendations to Preventing Scandals and Conclusion
This project focused on the scandal of AIG between 28 Oct 1999 and 30 Mar 2005. It will firstly provide an overview of the scandal and then shed light upon areas of AIG’s accounting, auditing and corporate governance with reference to relevant theories and concepts. The second part begins with accounting aspect which illustrates the motivations behind the insurance industry and the application of finite reinsurance. Regarding the auditing issues, the essay seeks to examine if external auditor PwC bewared, recognized and modified the real “problem” in AIG. Later the symptoms of the corporate governance will be analyzed by looking at agency-principal problem, organization culture, dysfunctional board and unprotected shareholders’ rights which had collectively led to the corporate failure. Finally, some general implications will be revealed.
Part 1: Overview
American International Group, Inc. (AIG) was widely considered as a world’s leading international insurance and financial service organization (AIG official website, 2009). Under Hank Greenberg’s leadership, AIG was regarded as one of the nation’s most profitable companies by the Business Insurance, and was ranked the third among the top ten companies on the Forbes Global 2000 List (Maury et al, 2007). Behind its huge success, however, AIG was engaged in series of improper reinsurance transactions. On 28 March 2005, the investigation by Securities and Exchange Commission (SEC) into the transaction between AIG and General Reinsurance Crop (General Re) reveals the illegal use of a sham risk-free swap, which allowed AIG to artificially add $500 million in premium revenues as its reserves in 2000 (Petro, 2005).
As the investigation was extended, the involvement of AIG’s top executives in using two interest-conflicting offshore companies controlled by Greenberg, Starr International Co. (SICO) and C.V. Starr & Co. (Starr), to compensate themselves was revealed. Another two off-shore reinsurance companies, Richmond Insurance Company Ltd and Union Excess Reinsurance Company Ltd which based in Barbados where the laws were inadequate to restrict the establishment of reserves have conducted the similar transactions with AIG as General Re did. Furthermore, the investigation revealed that AIG and Brightpoint Inc. both agreed on a non-traditional reinsurance which enabled Brightpoint to hide the loss of around $12 million during 1998 and 1999 (Petro, 2005). The investigation into AIG’s fraudulent transactions has mushroomed into a growing scandal that tarnished its reputation. As a result, Greenberg stepped down as the CEO and the company was fined $1.67 billion (Eichenwald & Anderson, 2005). Furthermore, share price of AIG dropped 22% and S&P downgraded AIG’s debt rating from AAA to AA+ (Brady et al., 2005).
1.1 Timeline of AIG Scandal(可借鉴)
Board of SICO
Board of AIG
Board of C.V.Starr...
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