AIG Accounting Fraud: No Admissions, Big Fines, Bad Ethics

The former Chief Executive Officer of AIG, Maurice Greenberg and his co-defendant, Howard Smith, AIG’s former chief financial officer, reached a settlement with the State of New York in a case of accounting fraud.

The case, which took more than 10 years to adjudicate ended with the two executives agreeing to fork over $9.9 million in performance bonuses. It sounds impressive until we understand that the state had sought more than $50 million and the executives refused to admit to fraud.

The executives were accused of participating in deals aimed at fooling investors into investing in the AIG company, one of the world’s leading insurance leaders.  Accounting fraud comes in many forms.  At the settlement, the State of New York stated:

“Today’s agreement settles the indisputable fact that Mr. Greenberg has denied for 12 years: that Mr. Greenberg orchestrated two transactions that fundamentally misrepresented AIG’s finances.”

Deny to the end

A lawyer for Greenberg characterized the settlement as a “nuisance settlement,” and that they settled so he could keep working in the securities industry. While the battle between AIG and the State of New York has been bitter from the start, it was made even more contentious as the State forced Greenberg’s son from a large insurance brokerage claiming it was rigging bids and getting kickback payments – perhaps another example of accounting fraud?

Greenberg’s defense took the tactic that he had intended to comply with the rules of accounting but that he left the details of that compliance to his subordinates. In other words, his underlings were at fault.  Rule one in accounting fraud cases – blame those under you and assume that they were acting ethically.

AIG itself nearly went bankrupt in 2008. The DA’s who brought the case came and went, the trial dragged on, and ten years later the very wealthy executives walked away without little admission of guilt and relatively little in penalties.

Though we would like to say that this case is a victory for “ethics,” it is anything but that conclusion. The executives, extremely wealthy people of privilege paid a pittance in penalties (about 80 percent less than the Feds had expected). The trial took so long, that after a while the prosecution was worn down to the point that they seemed to be willing to settle. Worst of all, the defendants maintained that while minor irregularities were committed, they had done nothing wrong.  So do minor irregularities equal accounting fraud?

Of course, they were wrong, they intentionally duped investors into believing the company was in better financial shape than it was. They manipulated the books and in doing so reaped even greater bonuses and rewards.  It’s hard to view this in less than the lense of intentionla accounting fraud.  I supose some would argue differently!

Accounting Fraud: Where are the ethical screens?

We are in a digital age where financial performance and analytical data seem to take precedence over honesty and ethical behavior. The surprise in this case might have been that the accounting fraud was discovered. It is impossible to know how much manipulation in how many publicly traded companies occurs as a matter of routine. This is not a victimless crime nor is it minor in its intent.

Millions, if not billions of dollars were invested here and while a handful of insiders gained and profited, potentially thousands of investors stood to lose large sums of money because AIG had inflated their performance.

The question that remains is could good ethics have prevented this fraud? The answer is, “possibly.” Had an ethical screen been violated, it could have led to executives to be immediately terminated from their positions. It could have paved the way for a more rapid outcome in the court’s decision as well.

As the CEO and CFO did not have any ethical expectations of them, greed ruled the day and the executives “escaped” with only minor consequences. The need for ethics, from the smallest to largest organizations is apparent. It is up to investors to determine if in the absence of ethics they are willing to take the risks.

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Posted by Chuck Gallagher in Accounting Ethics and tagged , , , .

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