For years, PricewaterhouseCoopers LLP gave a clean bill of financial health to American International Group Inc., only to watch the insurance giant disclose a long list of accounting problems this spring.
But in checking for trouble, PWC might have asked the audit committee of AIG's board of directors, which is supposed to supervise the outside accountant's work. For two years, the committee said that it couldn't vouch for AIG's accounting.
In 2001 and 2002, the five-member directors committee, which included such figures as former U.S. trade representative Carla A. Hills and, in 2002, former National Association of Securities Dealers chairman and chief executive Frank G. Zarb, reported in an annual corporate filing that the committee's oversight did "not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles."
Further, the committee said, it couldn't assure that the audit had been carried out according to normal standards or even that PWC was in fact "independent."
While the distancing statement by the audit committee is not unprecedented, the AIG committee's statement is one of the strongest he has seen, said Itzhak Sharav, an accounting professor at Columbia University. "Their statement, the phrasing, all of it seems to be to get the reader to understand that they're going out of their way to emphasize the possibility of problems that are undisclosed and undiscovered, and they want no part of it."
Language in audit committee reports ran the gamut during those years as an economic downturn loomed and many committees rushed to add some kind of disclaimer. Some companies included the full disclaimer found in AIG's proxy; these included such blue-chips as Goldman Sachs Group Inc. and Wachovia Corp. -- but also WorldCom Inc. and other companies that later encountered big problems. Many other companies -- Lehman Brothers Holdings Inc. and Morgan Stanley, among them -- included milder disclaimers that merely said committee members relied on management and outside auditors for accurate information.
Still others -- including McDonald's Corp. and insurer Aon Corp. -- went in the opposite direction and took on more responsibility.
"There were definitely some that went closer to saying, 'Don't blame me,' as opposed to saying, 'This is the process,' " said Patrick S. McGurn, a senior vice president at the Rockville proxy advisory firm Institutional Shareholder Services. "I think that probably should set off more red flags as the language got stronger."
AIG's audit committee's disclaimer has found its way into a 224-page lawsuit filed by Ohio's attorney general accusing AIG of securities fraud and alleging that PWC disregarded key warning signs and, as a result, repeatedly issued "false and misleading" audit reports of the insurer's books.
The complaint says that PWC knew of or "recklessly disregarded" myriad "illegal" and "improper" accounting maneuvers, including the $500 million so-called finite reinsurance transactions with General Re in 2000 and 2001 that have since drawn the scrutiny of regulators.
"We cannot comment on client matters; however, that sort of proxy language was not uncommon pre-Sarbanes-Oxley [Act] and in fact was then used by many other large companies," said David Nestor, a spokesman for PWC. "Auditors would not have seen this as a 'red flag' or a scope limitation, as the board's proxy language simply described what was and what was not the responsibility of its audit committee at that time. Auditors also would not have been surprised to see that descriptive language change after the passage of the Sarbanes-Oxley Act in 2002." The act was designed to make executives responsible for their companies' accounting.
Michelle Gatchell, a spokeswoman for Ohio Attorney General Jim Petro, said the office is awaiting "more details about PWC's involvement" when AIG issues its thrice-delayed 2004 annual report, which the company says will appear by May 31 and which will include a restatement of financial results dating to 2000. This spring, AIG said it would cut its net worth by $2.7 billion, or more than 3 percent, because of a series of irregularities and mistakes.
