Question

Scandal in American International Group, Inc.

Describe in detail the unethical action the company was involved in. Explain the following:

a. The situation.

b. What unethical behavior or action took place?

c. Corporate offices involved.

d. Any other stakeholder involved.

e. Managerial and Leadership implications and impact on stakeholders.

f. Legal Ramifications.

Answer 1

Scandal in American International Group, Inc.

Describe in detail the unethical action the company was involved in. Explain the following:

a. The situation.

AIG, American International Group Inc., is a multinational insurance corporation. Its primary activities include General Insurance and Life Insurance & Retirement Services.

AIG operates in more than 80 different countries and it has over 56, 400 employees over the world. According to the 2016 Forbes Global 2000 list, AIG ranks the 49^th in the world.

Even though AIG is such a giant corporation, it has encountered financial problems in the early 2000s.

AIG managers involved in financial scandals. One accounting scandal got revealed in 2005 regarding false statement transactions during 2000. In October In 2000, AIG released its third-quarter earnings showing increased premium but decreased loss reserve- this fall in reserve can imply cash problems for AIG. Share market reacted by fall in AIG stock prices. The Company managers tried to improve the perception through unethical behaviors

b. What unethical behavior or action took place?

AIG bought insurance from General Re( a Berkshire Hathaway company) and accounted such that its statements showed increased premiums as well as an increased loss reserve. AIG include the premiums as revenue and added $500 million to its loss reserve-liability. General Re was offe4ed $5 million commission.

NUFIC (AIG subsidiary) recorded it as a Loss Portfolio Transfer, and General Re recorded the transaction as a deposit which did not violate GAAP. Senior management developed a paper trail hiding the transaction of $5.2 to General RE from AIG.

AIG also shifted its liabilities to insurers in Bermuda and Barbados to improve its results

Now IAG was able to show improved financial statements in Q4-2000 and Q1 -2001.

c. Corporate offices involved.

• AIG- CEO of AIG was Maurice “Hank” Greenberg
• AIG subsidiaries,- National Union Fire Insurance Company of Pittsburgh (NUFIC) and Hartford Steam Boiler (HSB). AIG’s financial statement shows consolidated results of the subsidiaries
• General Re Corporation - subsidiary of Berkshire Hathaway, Inc and The CEO of General Re was Ron Ferguson

d. Any other stakeholder involved.

. Auditor of AIG- PricewaterhouseCoopers LLP -They were criticised for negligence and improper auditing of the financial statements of AIG.

e. Managerial and Leadership implications and impact on stakeholders.

Greenberg was removed from the CEO position. AIG had to pay fines and penalties to the tune of $ 1.64 billion in 2006. The scheme (as on Oct 31, 2008 ) made AIG shareholders suffer a loss of around $544 million to $597 million. AIG almost went bankrupt at the start of the finical crisis.

Failure in corporate governance and risk management practices along with lack of good culture paved the way for scandal. The situation was supported by lack of internal controls and external controls- the negligence of auditor PwC. AIG lost its reputation and the subsequent financial crisis led to a great downfall for AIG

Managers have to build a culture of ethics through training programs. The issue also shows the necessity for good corporate governance and internal controls. It also implies the requirements for proper controls from audit firms

f. Legal Ramifications.

January 2005- the counsel of General RE informed SEC to disclose the transaction

May 2005- AIG issued a financial statement for fiscal years from 2000 through 2003, which showed the reduced the income

The New York Attorney General filed a civil case against AIG. 4 executive members of General Re and AIG were convicted.

In 2010, PwC agreed to pay 97.5 million in settlement for AIG shareholders. In 2011, the charges were overturned and the executives were freed