American International Group Inc. said on Sunday it will restate more than four years of financial reports, slashing $2.7 billion from its net worth, because of accounting errors that misled investors about its fiscal health.
In a 10-page statement, the world's largest insurer by market value tallied a long list of improper actions that forced it to delay the filing of its annual 10-K report for 2004 with the U.S. Securities and Exchange Commission for a third time. It now says it expects to file no later than May 31.
"The restatement will correct errors in prior accounting for improper or inappropriate transactions or entries that appear to have had the purpose of achieving an accounting result that would enhance measures important to the financial community...," according to the statement.
The company laid blame for some of the problems on former top executives, saying "certain entries appear to have been made at the direction of certain former members of senior management without appropriate support."
The financial restatements follow an internal probe begun in response to investigations by New York Attorney General Eliot Spitzer and the SEC into the insurance giant's accounting practices. Criticism of past senior management could further taint former Chairman and Chief Executive Officer Maurice "Hank" Greenberg who headed the company for more than three decades.
Greenberg, and the company's former chief financial officer, Howard Smith, were forced out by AIG's board amid a probe into certain reinsurance deals, including one that improperly bolstered its reserves.
A spokesman for Greenberg's legal team could not be immediately reached for comment.
The $2.7 billion revaluation represents a 3.3 percent reduction in the company's net worth, $1 billion more than its original $1.7 billion estimated reduction at the end of March. It includes $2 billion of accounting errors and $700 million of incorrect estimates of taxes, acquisition costs and other allowances.
AIG said it would restate financial reports for the years 2000 to 2003 and the quarters ended March 31, June 30 and September 30 in 2004.
The accounting errors touched upon numerous areas where the insurer violated U.S. accounting principles. In some cases the company deferred expenses, or decreased reserves, both of which had the effect of boosting reported profits.
Even more seriously, however, AIG said several primary accounting entries were made in its books without supporting documentation on the orders of former senior managers.
Among other improprieties, AIG prematurely booked gains on some hedge fund investments that the insurer never saw because the money was reinvested.
Beyond the restatements, the New York-based insurance company said its internal review had yielded "material weaknesses" in its internal controls. It said its auditor, PricewaterhouseCoopers, would issue an adverse opinion in its own report on the company's financials.
According to corporate governance guidelines, auditors now issue closely-watched reports on clients' internal controls to show how well a company can prevent fraud.
AIG said internal control weaknesses include the ability of some former senior managers to "circumvent internal controls over financial reporting under certain circumstances," ineffective controls over accounting in certain deals and incorrect accounting of assets and liabilities.
Investigations by the New York Attorney General's office and the SEC have focused on a 2000 transaction between the General Re unit of Warren Buffett's Berkshire Hathaway Inc's and AIG to enhance the latter's financial strength. AIG has admitted the transaction wasn't accounted for properly.
The investigations by state and federal regulators of AIG have expanded well beyond the General Re deal and now include examinations of its payments into worker's compensation funds, and its relationship with re-insurers.
"We are disappointed that we have not yet been able to file our Form 10 K," said Martin Sullivan, AIG President and Chief Executive Officer, adding: "We are working diligently to complete the filing, at the same time assuring we have accurate financial statements, rigorous accounting, greater transparency and thorough disclosure."
AIG had at the end of March said it "believed" it would file the 10-K with the SEC by April 30, after having delayed it while it undertook an internal investigation of its accounting.
Separately, AIG also said it has uncovered certain errors in the way it accounts for derivatives, complex financial instruments often used to hedge against interest rate fluctuations, leading to a potential rise in shareholder equity of $2.4 billion as of December 31, 2004.
Since AIG disclosed that it had received subpoenas from New York and federal investigators on Feb. 14, it has lost about $57 billion in market value.
