Undergruaduate

Content

Introduction 2

Part 1: Overview 2

1.1 Timeline of AIG Accounting Scandal 4

1.2 Relationship Chart of AIG and Its Counterparties 5

Part 2: Accounting Issues 6

2.1 Background on Reinsurance and Relevant GAAP Rules 6

2.2 Manipulation Technique 1 7

2.3 Manipulation Technique 2 7

2.4 Retrospections 8

Part 3: Auditing Issues 9

3.1 Reasons for Auditing Failure 9

3.2 Retrospections 11

Part 4: Corporate Governance 12

4.1 Tone at the Top 12

4.2 Dysfunction of the Board 14

4.3 Low Engagement of Shareholders 15

4.4 Reactions and Its Effectiveness? 15

4.5 Possible Therapy 16

Part 5: Recommendations to Preventing Scandals and Conclusion 17

Introduction

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