Submitted by Francine McKenna, republished from Going Concern, Accounting News for Accountants and CFOs.
The US Federal government has been propping up AIG with hundreds of billions of dollars and AIG has been, in turn, protecting its auditor, PricewaterhouseCoopers (PwC).
Unfortunately for all of them, former AIG Financial Products head, Joe Cassano, is off the reservation and worried more about his own scalp. After two years of negotiations with the Department of Justice, it looks like he won't be criminally prosecuted for hiding risks from investors or lying at a December 2007 investor conference.
In spite of the fact he cut internal auditors out of the process, it turns out he did tell PwC about the growing risks and "required" accounting adjustments in the credit default swaps portfolio early in 2007. PwC's own notes show that they knew all about the risks that Cassano's Financial Products Group was taking long before the infamous "Everything is fine" presentation to investors in December 2007.
The Wall Street Journal (my emphasis):
As of last fall, authorities believed Mr. Cassano may not have properly disclosed the adjustment to PwC, people familiar with the matter have said.
"But in a series of meetings last fall, Mr. Cassano's lawyers insisted to federal prosecutors that he had been forthright about the adjustment...Prosecutors have since obtained notes written by a PwC auditor from a November 2007 meeting that appear to show Mr. Cassano informed the auditor about the adjustment and its potential positive impact...That would make it difficult to bring a strong criminal case against Mr. Cassano."
That's consistent with what I read in AIG Audit Committee Meeting minutes from January 15th, 2008. Attending the meeting from PwC:
- Tim Ryan (Global Relationship Partner for AIG and PwC's Financial Services Industry Group Head at the time.)
- Michael McColgan (Engagement Partner for AIG)
- Dennis Nally (Chairman and Senior Partner of PwC LLP, the PwC US member firm at the time and now Global Chairman of PwC)
- Henry Daubeney (Partner in PwC's Banking and Capital Markets Practice, London)
I believe that PwC was aware of weaknesses in internal controls over the AIGFP super senior credit default portfolio throughout 2007 and prior.
Why did I say that back in February? Because of this excerpt:
"Mr. Bensinger [AIG CFO] then indicated that he, Mr. Sullivan [AIG CEO] and Messrs. Ryan and Nally had been meeting regularly to discuss the control matters...Mr. Ryan commented that following the third quarter close, the PwC team debriefed and assessed a number of issues that had occurred, such as the securities lending program and the operation of AGF, Inc., the AIG Financial Products Corp super senior credit default swap portfolio and disclosure issues in the presentation of maximum exposures of UGC..."
PwC is cooperating not only with plaintiff's attorneys in the suits against AIG but with the Department of Justice. However, this particular "voluntary" disclosure by PwC makes them look bad and tells me AIG executives lied. Take a look at this story from May of 2008:
Pricewaterhouse's Squeeze Play AIG Says It Misled Auditor, As Greenberg Cites Review Clearing Internal Controls
American International Group Inc.'s lengthened laundry list of accounting woes shines the spotlight more brightly on the role played by its outside auditor, PricewaterhouseCoopers LLP...The insurer's latest release offered some relief for the accounting firm: It noted that "in certain instances," improperly booked transactions "may also have involved misrepresentations to management, regulators and AIG's independent auditors."...Pricewaterhouse wasn't told in full about AIG's ties to or dealings with two offshore reinsurance companies that AIG, because of the internal reviews, now plans to consolidate into its financial statements...AIG also acknowledged that former executives at times had been able to "circumvent internal controls over financial reporting."
If Cassano did tell PwC all about the Financial Products Group activities, and AIG told PwC about all of their control issues throughout 2007 and prior, what are the legal implications for PwC? PwC knew about and blessed AIG's subterfuges until they couldn't - the "negative basis adjustment" was an accounting trick.
AIG publicly said PwC had been duped. Now PwC is giving up workpapers and private notes that say they weren't duped, without a legal fight?
What else does PwC have on AIG? Or AIG on PwC?
Joe Cassano is done playing this game.
Isn't it time, finally, for regulators to force PwC to resign as AIG auditor? They have no independence or objectivity when it comes to their "client" AIG.