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 has easily been overshadowed by the adverse publicity received by the
huge company during the massive financial crisis that gripped the U.S. economy in the fall of 2008.
This case focuses on a series of events several years before that crisis.
In 2001, AIG management came up with an idea for a new financial service or product, namely,
developing customized SPEs or special purpose entities for large corporations. AIG’s executives
To enhance the credibility of this new product, AIG retained a senior partner of Ernst & Young,
Michael Joseph, who was a nationally recognized expert in the creation and operation of SPEs.
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.
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,
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American International Group, Inc.—Key Facts
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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.
2. In early 2001, AIG executives came up with the idea for a new financial service: developing
customized special purpose entities (SPEs) for large corporations.
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
6. During negotiations with AIG, PNC consulted with its audit firm to determine whether the
7. Joseph informed PNC’s auditors that AIG’s SPEs were GAAP-compliant; PNC would
eventually transfer more than $200 million of nonperforming loans to SPEs created for it by AIG.
9. In July 2002, the SEC ruled that PNC’s SPE transactions had violated GAAP and ordered the
10. In December 2006, the SEC ruled that Michael Joseph had been a “cause of PNC’s violations”
of federal securities laws and suspended his right to practice before it for three years.
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
Instructional Objectives
222 Case 5.2 American International Group, Inc.
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
earnings and financial condition.
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
Public Interest: “A distinguishing mark of a profession is acceptance of its responsibility to
the public . . . The public interest is defined as the collective well-being of the community of people
and institutions that the profession serves . . . In discharging their professional responsibilities,
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Integrity: “Integrity is measured in terms of what is right and just. In the absence of specific
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
company’s “continuing accountant,” typically its existing audit firm.
Many companies have used SAS No. 50 engagements to effectively “interview” replacement
auditors for their existing audit firm or, to be more blunt, to “opinion shop.” When a disagreement
arises between an audit client and its audit firm regarding the proper accounting treatment for a
transaction, particularly, a new or unusual transaction, the audit client may retain another accounting
firm to provide a SAS No. 50 report on the proper accounting treatment for that transaction. The
principal ethical dilemma posed by this scenario is the fact that the accounting firm retained to issue
the SAS No. 50 report has an economic incentive to “side” with the potential client regarding the
proper accounting treatment to be applied to the given transaction. Why? Because doing so may
result in that accounting firm being retained as the given company’s new auditor.