American Insurance Group Scandal

AIG- Brief Description

American International Group (AIG), ne f the largest insurance/financial service companies in

US, was once thought to be too big to fail. Established in 1919 by Edwin Cornelius Vander Starr,
AIG has offices in more than 130 countries that provide life insurance and retirement service
through three subsidiaries: Chartis, Sun America Financial Group and Financial Services.

The Scandal
In 2000, Security Exchange commission recognized that AIG assisted a client company in
strengthening their balance sheet through a fake insurance transaction
Till 2003 the investigation was continuing after which SEC and Justice Department
settled with AIG for a penalty of $10milliion
In 2004, the federal grand jury filed a complaint against the company after investigating
the Companys smoothing products
In 2005, the reinsurance agreement for $500 million with Gen Re, allowed AIG to
improve its reported reserves improperly. During the month 2005 the cany exses that
the reinsurance deal should have been accountant as deposit. In mid 2005, AIG admits
that they done improper accounting. They engaged in misleading accounting and
financial reporting.
The companys two improper transactions gave the investors the impression that the
Company has large reserves for claim than it did.
CEO Hank Greenburg was the main culprit behind this scandal. He booked loans as
revenue, made traders to inflate stock prices. The CFO, Howard Smith supported the
CEO Hank Greenburg in this scandal s well.

RESULT OF THE SCANDAL

In Feb 2006, the matter was taken to court where they alleged violation of 16 counts.
Conspiracr-1count, Securities Fraud 7 counts, False statements- 5 counts, Mail fraud
3 counts
The company agreed to pay a total $126 million to SEC to settle the fraud charges
They were even supposed to pay a penalty of $80 million and disgorgement and
prejudgment interest of $42 million.
The CEO had t pay $115 million for stakeholder. The CEO and CFO were made to pay
$150 million as legal fees.
 IMPACT OF THE SCANDAL
Employees: The employees were told to buy the shares to help sustain the
companys losses. Moreover the Employees had to worry abut their job position.
The company disrespected the employees contribution too.
Here the moral right of stocking information was violated in a neat manner.
Company: The Company fired its CEO and CFO. They even lost the interest of
investors and shares. The company had to pay $ 115million to settle shareholder
lawsuits
Government: AIG being one of the leading insurance Company in the world. The
scandal created great negative impact in the Government. The Government has to
worry because a lot of Americans have invested in the Company. AIG gave
misleading information to the Government about the insurance transactions and
Accounting transactions. This even made people to think bad about the Government
because the Government had 80% control over the company.
Public: the people had to lose a lot because all their insurance was at lot of risk
during the scandal. The company had lot improper transactions. They gave
misleading information to common people abut their reserves, making them seem
large compared to what they really were.
Apart from this, the peoples ethical trust towards the company was totally lost.

Ethics Violated
A set of rules for accounting which was made for reason was totally lost.
They did improper accounting and improper insurance transactions
They totally damaged the reputation of the customers and stake holders had about the
company. For which they deserved t ay $115 million.
This even created a sign an anxiety and greed towards the small companies which
thought their fraud couldnt be identified.
This accounting scandal mentally affected all its customers and the people who had
insurance policies with other companies.

Recommendations
The official securities should more research about the company and try to solve the
problem right away.
 The government should track these transactions between companies because in this
scandal it shows that the government didnt know about the violations until the
company themselves exposed.
They should always keep an eye on the top people because in this case the CEO Hank
Greenberg and CFO Howard Smith were the main culprits.
The government should always keep a close track of the companies accounts to check if
theres any fraud activity.
Moreover the people or investors should take initiative to keep a close attention
towards any companys net income before investing.