American International Group Inc.’s public admission this week that it engaged in improper accounting practices has placed AIG’s auditor — PricewaterhouseCoopers LLP — squarely in the sights of government regulators and plaintiffs’ lawyers. Here are the earlier posts on the fast developing scandal that has enveloped AIG and Berkshire Hathaway over the past several weeks.
Federal and state investigators (Mr. Spitzer is seemingly everywhere these days) are currently evaluating what AIG told PWC auditors about the questionable transactions, but it is only a matter of time before investigators and class action securities plaintiffs’ lawyers will begin to question PWC regarding its failure to uncover the allegedly improper accounting. As noted in this earlier post, one of the most troubling aspects of the current AIG investigation is that many of these transactions under scrutiny may well have been reviewed and approved by various business professionals working on behalf of AIG. Already, press reports on the AIG investigation assume that the accounting for the transactions was improper, and any defense that the transactions were accounted for properly has been shoved aside in the wave of negative publicity and the AIG board’s efforts to bend over backwards for the regulators in an attempt to limit the collateral damage to AIG’s stock price.
At any rate, if the transactions were accounted for improperly and were material, generally accepted accounting principles require that AIG restate its financial reports for several past years. If the violations are not deemed material, then AIG could correct its financials by taking a one-time adjustment to its fourth-quarter results for 2004. The question of whether an accounting violation is material is determined by whether the financial result of the violation would have influenced the opinion of a hypothetical reasonable investor. AIG has already stated that correcting the known violations would reduce its $83 billion net worth by only 2%.
So, as we wait for the other shoe to drop on PWC, let’s hope that governmental regulators take note of this point.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Great post. I read your last post (the link) back when you first posted it, and I agree completely. I’m no big fan of public accountants — most of them are a lot stupider than they need to be in today’s world, which is a structural problem in the profession — but the solution is not to destroy the firms that have brand equity. It is the brand equity that keeps them careful.