The decades-long relationship between PricewaterhouseCoopers (PWC) and American International Group (AIG) is being scrutinized as regulators allege the accounting firm overlooked problems and issued false audit reports.
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The insurance company's own audit committee said it could not vouch for AIG's accounting in 2001 and 2002, the Washington Post reported. The five-member group, which is part of AIG's board of directors, said in an annual filing that the committee's oversight did "not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles." The committee went on to say that it couldn't assure that the audit has been done under normal standards or that PWC was “independent.”
"Their statement, the phrasing, all of it seems to be to get the reader to understand that they're going out of their way to emphasize the possibility of problems that are undisclosed and undiscovered, and they want no part of it,” Itzhak Sharav, an accounting professor at Columbia University, told the newspaper.
The strongly worded disclaimer is discussed in a lawsuit filed by Ohio's attorney general. The suit accuses AIG of securities fraud and alleges that PWC disregarded key warning signs. The complaint says that PWC knew of or "recklessly disregarded" myriad "illegal" and "improper" accounting moves. As a result, PWC repeatedly issued "false and misleading" audit reports.
"We cannot comment on client matters; however, that sort of proxy language was not uncommon pre-Sarbanes-Oxley [Act] and in fact was then used by many other large companies," said David Nestor, a spokesman for PWC. "Auditors would not have seen this as a 'red flag' or a scope limitation, as the board's proxy language simply described what was and what was not the responsibility of its audit committee at that time."
Meanwhile, the state of New York joined Ohio in filing a complaint against AIG. New York Attorney General Eliot Spitzer and the New York Insurance Department on Thursday named AIG, former Chief Executive Maurice "Hank" Greenberg and former Chief Financial Officer Howard Smith in a lawsuit filed in Supreme Court in Manhattan, the Associated Press reported.
One former AIG director, Dean P. Phypers, told the Washington Post that PWC and Greenberg are victims of changing standards. "He paid more attention to internal controls, and insisted they had good internal controls, than anybody I ever worked with," Phypers said. "If they now suddenly don't have good internal controls, either they now have new rules or everybody's lost their mind."
Georgia Institute of Technology accounting professor Charles Mulford said that it appears as if AIG took many actions to report steady earnings over the years.
"What it says is, the company was riskier than it appeared," he said. "I think they were doing something that was generally accepted as being done, but then the world changed."
AIG is expected to file its often-delayed annual report with securities regulators early next week.