Saturday, April 30, 2005
The daily dose of accounting revelations at American International Group is like water torture* for the company, with each disclosure discussing a seemingly new way in which it appears to have manipulated its premiums, quarterly income (see previous post here), and reinsurance risk (think General Re transaction). Today's example comes via a New York Times article (here) in which former executives of the company are said to have disclosed that from the mid-1990s until 2001, the company booked premium payments before a final contract was reached with the party purchasing the insurance so that division executives could meet their monthly numbers at the American Home Assurance and National Union Fire Insurance units. The article asserts that this pre-booking of premiums did not affect AIG's financial statements because the amounts were not large (about $1.5 billion at American Home and $100 million at National Union), and that contracts which did not come through were reversed in subsequent months. Whether it hit the bottom line or not -- and I suspect that at least some of the revenue and earnings manipulation disclosed in AIG's internal investigation would also incorporate early revenue recognition -- this type of activity is further evidence of a corporate culture that viewed the rules as obstacles to profitability rather than guides for how to conduct a business properly (see earlier post here regarding AIG's reporting of workers compensation premiums). Indeed, the article notes that AIG's internal auditors put the early premium revenue in a category called "Games," a sure sign that things were not on the up-and-up. Drip . . . drip . . . drip. (ph)
* Although it is usually called "Chinese water torture," this item from "The Straight Dope" (here) notes that it is not really a Chinese practice but a derogatory term.