AIG Accounting Scandal

1. THE AIG ACCOUNTING AND
AUDITING SCANDAL IN 2005
Worked by Klejs Kukaviqi

2. SIGNIFICANCE OF CASE
• The AIG accounting scandal of 2005 is
still remembered as a key event in
business history because it exposed
dishonest accounting methods that
deceived investors and seriously
reduced market value for both the
company itself and also other insurance
companies in the market globally.

3. MAIN REASONS OF
RESEARCHING THIS CASE
• 1-Scale and Impact: The AIG accounting scandal is an
intriguing case study for understanding the dynamics
of corporate wrongdoing because of its sheer size and
scope.
• 2-Financial Reporting and Auditing Lessons: The AIG
incident exposed flaws in the procedures for financial
reporting and auditing.
• 3-Corporate Governance and Regulatory Oversight:
The AIG incident brought attention to how crucial good
company governance and regulatory monitoring are.
Examining this case enables researchers to look at the
effects of poor governance
• 3 Important aspects of understanding
and getting a correct insight are:
1-Financial reporting and accounting
2-Auditing
3-Organizational composition

4. STORY OF THE FAILURE
• Where and when did it start?
The AIG accounting and auditing scandal happened
in 2005 but the faults that caused it had started much
earlier, years prior.
The American International Group (AIG) corporate
headquarters in New York City, the United States,
was where the majority of the AIG accounting
controversy occurred. AIG officials and personnel in
the company's financial and accounting departments
were behind the shady accounting practices and
inaccurate transactions

5. WHAT HAPPENED AND HOW DID IT UNFOLD
• 1-Reserves Manipulation:
AIG participated in a scheme known as "loss
mitigation insurance" or "finite reinsurance”.
However, AIG inflated its reserves artificially
using these contracts, giving analysts and
investors the impression that it was in a better
financial situation.
• 2-Improper Transactions:
AIG took part in several transactions that went
outside accepted accounting practices. One
significant instance was a deal with the General
Re Corporation. As a result of this unethical
transaction, AIG was able to falsely inflate its
financial results.
• 3-Weak Internal Controls:
AIG's internal control shortcomings were a major
factor in the accounting disaster. The absence of
oversight and monitoring allowed the fraudulent
actions to continue for a long time without being
discovered.
• 4-Regulatory monitoring:
It was discovered that there was insufficient
regulatory monitoring and enforcement in the
financial sector, notably in the insurance sector.
Regulators' inability to spot AIG's accounting
errors highlights gaps in their oversight of
financial organizations.

6. THE EFFECTS THE SCANDAL HAD ON THE MARKET
1- Stock price decline
2-Erosion of Shareholder Value
3-Credit Rating Downgrades
4-Investor Trust

7. LEGAL AND REGULATORY REPERCUSSIONS
• 1- Investigation by regulatory
authorities
• 2-Criminal cases opened for
executives and employees
• 3-Shareholder litigation

8. DEAL WITH THE SEC
• In 2006, AIG and the SEC (SEC. 2006) negotiated an agreement that resolved the
allegations of accounting fraud. One of the highest fines ever levied by the SEC at the
time, AIG agreed to pay a fine of $800 million. AIG was also compelled by the
settlement to improve its internal controls and financial reporting procedures as well
as carry out significant corporate governance reforms.
• It is reported that the fine went up to the amount of $1.6 billion up until 2006, only 1
year later.

9. MAIN EFFECTS OF THE SCANDAL ON THE COMPANY ITSELF
• 1-A shakeup in AIG's management
• 2-Major governance reforms
• 3-Reputation damage and rebuilding
which took a lot of effort, time and
money
• 4-Financial impact and restructuring
• 5-Major impact on the insurance
industry.

10. HOW COULD IT HAVE BEEN PREVENTED?
• 1-Strengthened Internal Controls
• 2-Enhanced Corporate Governance
• 3-Ethical Leadership and Tone at the Top
• 4-Whistleblower Protection
• 5-External Auditing and Regulatory
Oversight
• 6-Transparency and Disclosure
• 7-Training and Education in Ethics
• 8-Collaboration Within the Industry

11. HOW COULD AUDITING HAVE PLAYED A ROLE IN
PREVENTING THIS?
• 1-Independent verification
• 2-Assessing Internal Controls
• 3-Discovering Irregularities and
Misstatements Early on
• 4-Professional skepticism
• 5-Adherence to Auditing Standards
(ISA, GAAS)
• 6-Reporting to Management and Audit
Committee

12. CONCLUSIONS
• Overall, the AIG accounting scandal serves as a reminder of the value of moral
behavior, strong internal controls, and efficient regulatory monitoring in preserving
the accuracy of financial reporting. In order to safeguard shareholder interests and
uphold public trust, it emphasizes the necessity for businesses to promote openness,
accountability, and adherence to regulatory obligations.
• In this case, the discovery and prevention of accounting anomalies and fraud could
have been considerably improved by a thorough and independent auditing process,
professional skepticism, and adherence to auditing standards.

13. THANK YOU