CASE 5.2
AMERICAN INTERNATIONAL GROUP, INC.
Synopsis
AIG has a long and proud history in the global insurance and financial services industry.
However, that proud history was easily overshadowed by the adverse publicity received by the huge
Joseph wrote SAS No. 50 reports to validate the acceptability of the accounting treatment for
transactions involving AIG-created SPEs and AIG used those reports in marketing its new service.
[Note: the technical material in SAS No. 50 is integrated into AU Section 625 of the PCAOB’s
Interim Standards and AU–C Section 915 of the AICPA Professional Standards.]
Among the first companies to express an interest in AIG’s SPE service was PNC, which at the
time owned and operated the nation’s fifth largest bank. PNC management was concerned that their
independent auditors might object to the SPEs that the company was considering “purchasing” from
AIG. Ironically, PNC was audited by Ernst & Young, Michael Joseph’s firm. Not surprisingly,
Joseph was the individual given the responsibility to persuade the PNC auditors that the SPEs and
280
Case 5.2 American International Group, Inc.
281
American International Group, Inc.—Key Facts
1. AIG, a global provider of insurance and other financial services, was one of the ten largest
companies in the U.S. and among the twenty largest companies in the world by 2000.
3. The principal selling point for this new service was its ability to help companies “manage their
4. AIG realized that its new SPE service would be more credible if one of the major accounting
5. Among the first companies to express an interest in AIG’s SPE service was PNC, a large
financial services firm that operated the nation’s fifth largest bank.
6. During negotiations with AIG, PNC consulted with its audit firm to determine whether the
8. In early 2002, the Federal Reserve forced PNC to reverse its SPE transactions and include the
$200 million of nonperforming loans in its consolidated financial statements.
9. In July 2002, the SEC ruled that PNC’s SPE transactions had violated GAAP and ordered the
11. In 2004, AIG agreed to pay $126 million in fines and restitution for its role in the PNC
12. In late 2008 during the sudden and massive economic crisis that gripped U.S. and global capital
markets, the federal government seized control of AIG to prevent the company from collapsing; AIG
would ultimately be the largest recipient of federal bailout funds intended to stymie that crisis.
282 Case 5.2 American International Group, Inc.
Instructional Objectives
1. To demonstrate the importance of accountants and auditors avoiding conflict of interest
situations in which their apparent and/or de facto independence and integrity may be impaired.
2. To demonstrate how “creative” accounting can be used to manage or distort an entity’s reported
Suggestions for Use
This case documents the recent trials and tribulations of AIG, the large insurance and financial
services company that became the “poster child” for the massive federal bailout plan implemented
by Congress in the fall of 2008. You might consider packaging this case with the New Century and
Madoff Securities cases to provide your students with an overview of three companies that played
key and infamous roles in the recent crisis that severely disrupted the U.S. economy.
Suggested Solutions to Case Questions
1. Regardless of the specific service (auditing, consulting, taxation, etc.) that they happen to be
providing, as professionals CPAs have an obligation to serve the public interest. In my view, it is
not in the public interest to help companies conceal or obscure their true profitability or financial
condition even if professional standards do not specifically prohibit them from doing so. The ethical
standards most relevant in this context are “public interest” and “integrity,” which are the second and
third “principles” included in the AICPA Code of Professional Conduct. Following are selected
excerpts from the Code’s discussion of those two principles that you may want to refer to during in-
class discussion of this case.
Case 5.2 American International Group, Inc.
283
2. To begin with, a little background information on SAS No. 50 that you may find helpful. AU
Section 625 incorporates SAS No. 50, “Reports on the Application of Accounting Principles,” and
SAS No. 97, “Amendment to Statement No. 50, Reports on the Application of Accounting
Principles.” SAS No. 97 was issued in June 2002 and became effective after the key events in this
case took place. The key change that SAS No. 97 made to the earlier SAS No. 50 requirements was
to prohibit accountants from issuing reports on “the application of accounting principles to a
hypothetical situation.” That is, SAS 50-type reports must now involve specific situations and
specific entities.” (AU 625.10 describes in detail the form and content of a SAS No. 50-type report,
while AU 625.11 provides an example of such a report.) Final note: in the “clarified” AICPA
Professional Standards, the SAS No. 50 technical material is integrated into AU-C Section 915.
result in that accounting firm being retained as the given company’s new auditor.
A related ethical dilemma is the incentive of the “reporting accountant” to not obtain a full
understanding of the transaction on which it is being asked to report. By failing to properly
investigate the given transaction that firm may be able to more readily justify the accounting