Assume that you are a member of the Forensic Accounting Team responsible for the investigation of one of the following infamous Fraud Cases:
Select a Fraud Case from those listed above.
The AIG General Insurance has been under fraud case with the Greenberg Company for improper intercompany transactions. American International Group, Inc. is also known as the AIG general insurance operating in the financial and insurance sector. The company has its presence in more than 100 countries. In the year 2001, AIG Company has been claimed by the securities exchange commission for bolstering the company’s balance sheet with improper accounting transactions. AIG reinsurance deal with General Reinsurance Corporation deals which should have been accounted as a deposit was not done. The fact came into light with the AIG Company disclosing with the accounting changes on March 30, 2005. At that time restatement of accounts amounted to reduction of the company’s net income by $1.32 billion (Simser, 2014).
In the year 2005 Spitzer filed suits against the AIG against the allegations of reporting misleading accounting practices in the financial reporting of the company which represented a favorable picture for the investors. It gave an impression for the company that it was having a larger amount of reserves that it actually have (Ni & Van Wart, 2015).
In the year 2006 February the Justice Department that is the US District Court settlement with the AIG was in excess of $1.6 billion. The key personal of the companies like the CEO and CFO of the companies were replaced. There were in total of 16 violations that were alleged against the company relating to conspiracy, securities fraud, mail fraud and incorrect statements to the Securities exchange commission (Reurink, 2016).
AIG is the leading company in the global leading insurance companies. The AIG Company was alleged with a violation, which were treated as a criminal conduct under cases like securities fraud and accounting manipulation. In the year 2000 October 26, the AIG Company announced that the premiums it received for the insurance has increased steadily in the third quarter of the financial year. At the same time the company said with the increase in premium there was a substantial fall in the reserves of the company. The same was not treated to be in the best interest of the investors and stakeholders of the company where the share price of the company has seen a massive decrease by about 6%. The company was also charged with the fact that it was using collateral for buying mortgage backed securities. It was also acquiesced of the fact that the company was hiding financial losses in the company’s financial statements (Clarke & Dean, 2014).
Greenburg asked Ferguson for a temporary transfer of loss reserves to the AIG subjecting an amount which is equal to around $200 to $500 million which will be with the AIG Company for around 6-9 months of time frame. AIG had certain terms and conditions like it should not suffer any loss or additional exposures. In contrast to the above deal General Reinsurance was offered $5 million for going ahead with the deal (Khaneja, Bhargava & Gupta, 2017).
The round tripping of cash in which the CRD has paid $10 million in premium without even paying for the same. The contract was an existing leverage one where the General Reinsurance held $31.8 million which was payable to the AIG company. The General Reinsurance Company had some existing contract with the AIG’s company Hartford Steam boiler where it had paid just $7.5 million. The General Insurance Company paid $9.1 million to the National Union for reinsuring the losses of the Hartford Steam boiler company. The CRD had paid an total amount of $0.4 million to the General Reinsurance company for the reinsurance contract and then the company had tried to receive a loss payment which was around $13 million. The CRD then pays the premium of $10 million to AIG where the General Reinsurance Company was left with $ 5.2 million. The problem came when the AIG Company started deviating from company’s primary operation and started trading into complex financial securities like Mortgage backed securities and credit derivatives. AIG started becoming a dominant market player in the field of insuring with other company’s debt with unexpected losses arising due to its greater credit ratings it started providing security for the same (Alegria & Paz, 2017).
The Accounting problem was with both the companies where the Gen reinsurance company used the deposit accounting and AIG used reinsurance accounting. The AIG Company has considerably increased the reserves of the company in the forms of borrowing by other companies. This constant temporary decrease in the reserves of the company and increase in the earnings of the company as compared to the industry average (Banerjee, 2015).
The AIG Company has entered into complex derivatives products where the company exposure into complex financial products increased rapidly. The AIG’s Financial Products Unit (AIGFP) collaboration, with the AIG in the year 1987, which was lead by Howard Sosin. The collaboration with the company had an agreement of around 38% of AIGFP and 62% with the AIG. This has led the AIG Company with huge volatility in the business and financial risk the company was exposed with. The AIG was approached by JP Morgan’s for a proposal of complex corporate debt. The Business Professor Gary Carton claimed that the chance of AIG failure because of such exposure with derivatives trading. In the year 2002, the AIGFP has been charged by the justice department as it was illegally guiding PNC Financial services for helping them with the accounting manipulation by not showing the bad assets of the company correctly. The company helped PNC by setting up a special purpose entity which will take care of all the assets of the firm. AIGFP was charged in the year 2002 with an allegation for setting up such accompany by the fed which was not real for investing and carrying on business. The AIG had to finally render out $45 million of fees, along with a fine which was subject to around $80 million and along with that the company will be paying all off the interest back it had actually earned from the deal. In the year 2005, when Greenberg had to step down from the post of CEO because of the investigations and allegations made on the company due to the accounting malpractices from the firm by the Attorney General of New York Eliot Spitzer. Though the issue was directly not related to the AIGFP but the exposure and direct influence of the Credit Default swap could give a real blow out for the company. The credit ratings of the company got degraded by AAA notch to AA notch. This reduction was the reason behind the provisions created by the AIGFP for the credit default swaps it was exposed to. The above incident made AIG pay around $1 billion for the collateral. As the housing market saw a collapse with the real estate and the credit default swap bubble burst the AIG shed around 1.5 billion dollars to the Goldman Sachs for the credit default swaps insured by the AIG for covering up the mortgage backed securities. The year observed some volatile events for the company with the company stock price falling by almost 25 percent and the company reporting a total loss of $1.1 billion for the portfolio swaps in the AIGFP. The CEO of the company Greenberg had claimed that the internal control, rules and procedures he built was abandoned by the management of the company after he stepped down. Greenberg also claimed that some of the management irresponsible behavior and by not giving a proper oversight to the AIGFP division the company had to face a lot of trouble originating as the division’s $500 billion portfolio. The company had already marked $50 billion losses and had also made a mark to market loss of around $25.9 billion. The exposure was in the investment portfolio in the form of credit default swaps. Greenberg also said the exposure to the credit default swaps within subprime mortgages considerably increased since the time he stepped down.The deviation of the company operating activity into complex and sophisticated financial products and securities like the credit default swaps and mortgage backed securities and insuring other company’s debt obligation has increased the financial risk of the company (Reurink, 2016).
Perpetration of the AIG Fraud Scheme
In the Trial Testimony, which was recorded on 11 November 2000, the witness for prosecution John Houldsworth said to Monrard, CPA the accountant said they want the accounting to be done but they were not looking for any real risk and exposure. The email, which was sent to Ferguson, which had a draft stating that general insurance, should not transfer any losses under the contract. Monrard informed AIG about the accounting deal and the symmetrical accounting, which could not be possible. There was enough evidence that the accounting procedure was in the Ferguson knowledge. Robert Graham had stated in an email about the two-step portfolio contract between the CRD and the National Union. The General insurance had booked the transaction between the parties as a deposit. Graham also said that it is between the AIG that how they book there transactions with in their books. It is the AIG whose reputation will be at stake and that the Regulators of the U.S. could disallow and attack the transactions done (Oliver, 2017).
There were certain accounting cross transactions and manipulations done by the AIG in order for recording of transactions and accounting practices it used. AIG had inflated its earnings by showing other companies deposits as premium received or as the earning in the financial statements of the company. The other round tripping of cash was one part of the deal where the company cross converted the cash from companies to companies in the form of premium and deposits. General Insurance and other group companies participating in the deal took the accounting as a depository accountancy transaction. There should have been proper disclosure by both companies of the round transactions of the deposits and the premiums. The companies should note have presented incorrect information in the financial statements. The accounting fraud had endangered the company’s credibility and goodwill of the company (Huimin, 2014).
There should be certain laws and regulations, which should be set up by the regulators and oversight boards. The ethical guidelines and principle for working in the corporate environment should be such that the corporate governance of the company directs the work. There should be regular audit at different period of the company for ensuring compliance and smoothen work of the company. The Regulators and Accounting oversights boards should set up strict laws, methods and techniques for early detection and quick action for any incorrect or manipulative information. The operations of the company should not deviate much from the core business line like the AIG did it did deviate into complex financials products and services which exposed the company to the verge of bankruptcy. Companies should make proper disclosure about different investment, opportunities and projects. If proper disclosure and concerns are not granted for the same where the risk volatility and exposure is huge it can erode investors financial wealth and disrupt the economy into financial crisis (Segal, 2016).
The AIG fraud has left a deep impact on the insurance sector for the improper and incorrect ways and methods used to inflate earnings of the company. The accounting method and the aftermath of its exposure of company several trades has degraded the company’s credibility and goodwill in the insurance sector. The credit ratings of the company severally degraded from AAA notch to AA notch. The company had a more several impact after the company’s key personal step down and the company’s exposure to the financial products. The company had used incorrect financial statement and accounting transactions in the verge of competition. The biggest fall for the company was in the financial crisis of the 2008 when the company’s branch of AIGFP had to shed out billions of dollars in contrast to the exposure it was having in the Credit default swaps and collateralized debt obligations. The worst part for the company was in the year 2005 after the whistleblower act for the AIG, which degraded the company’s credit rating and exposed it more to the financial and market risk.
Alegria, J., & Paz, M. (2017). Fighting Accounting Fraud through Forensic Analytics.
Banerjee, R. (2015). Who Cheats and How?: Scams, Fraud and the Dark Side of the Corporate World. SAGE Publications India.
Clarke, F., & Dean, G. (2014). Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation (pp. 9-29). Springer, New York, NY.
Huimin, M. (2014). FINAL PAPER.
Khaneja, S., Bhargava, V., & Gupta, L. (2017). Redefining the Role of Auditor in Curbing Creative Accounting Practices. International Journal of Management and Social Sciences Research (IJMSSR), 6(3), 32-37.
Ni, A., & Van Wart, M. (2015). Corporate Social Responsibility: Doing Well and Doing Good. In Building Business-Government Relations (pp. 175-196). Routledge.
Oliver, J. (2017). Is “transgenerational response” a hidden cause of failed corporate turnarounds and chronic underperformance?. Strategy & Leadership, 45(3), 23-29.
Reurink, A. (2016). Financial fraud: A literature review (No. 16/5). MPIfG Discussion Paper.
Reurink, A. (2016). Financial fraud: A literature review (No. 16/5). MPIfG Discussion Paper.
Segal, S. (2016). Accounting frauds–review of advanced technologies to detect and prevent frauds. Economics and Business Review, 2(4), 45-64.
Simser, J. (2014). Culpable insiders–the enemy within, the victim without. Journal of Financial Crime, 21(3), 310-320.