Wednesday, April 27, 2005

Ignoring Legal Advice at AIG

One item turned up in the internal investigation at American International Group is an accounting problem related to workers compensation policies sold by the company.  According to a Wall Street Journal article (here), AIG may have treated shifted premiums from the workers comp policies, which would be subject to a 1% New York state tax to fund an insurance pool, to general liability policies to avoid paying the tax.  The interesting aspect of this problem is not so much the accounting treatment or tax avoidance (except, of course, to accountants and tax lawyers), but the fact that in 1992 AIG's general counsel, E. Michael Joye, informed senior management, including former CEO Maurice Greenberg, that the company's accounting treatment for the premiums was illegal.  Later that year, Joye resigned -- or perhaps was forced out -- from the company because of problems over the accounting issue.

Joye provided a copy of his memo about the workers comp issue to New York Attorney General Eliot Spitzer's office, and the Journal article reports that the company waived its attorney-client privilege regarding the matter to permit further investigation.  Under the Department of Justice guidelines for charging corporations, one important indicia of cooperation to avoid criminal charges is a willingness to waive the attorney-client privilege and work product protection, and AIG will do its utmost to cooperate to save its various insurance licenses.

If senior management did force Joye out because he was unwilling to go along with questionable, and even illegal, accounting practices, then that is an important sign of a corporate culture that regarded legal (and ethical) requirements as something to be gotten around or avoided.  One conclusion from the internal investigation of AIG is that its internal controls were easily evaded, and that is a further sign that management did not regard itself as being bound by the rules.  Haven't we heard this story before? (ph)

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Investigations, Legal Ethics, Securities | Permalink

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Tracked on Apr 28, 2005 6:29:37 AM