Financial Reporting and Analysis
Introduction
Financial reporting is essential to be carried out by businesses with respect to their performances throughout the year. It is essential for an organization that it should perform the reporting of its financial performance in its financial statements. However, it is not sufficient to only consider for presenting the financial performance of the company, rather it is also highly important that the material facts and findings as indicated should represent the true and fair view of the financial performance of the company. There should not be any biasness that should be involved in performing the reporting of financial performance of a company, and this is mainly because there are various important stakeholders of the organization that are directly associated with the performance level of the company and they uses such financial statements in making important decisions based on company’s performance level. But the analysis of the historical performance with respect to corporate reporting indicates that there are various such cases whereby the management involved in fraudulent practices which affected the overall performance level of all the stakeholders of the organization. One such example of fraudulent practices being carried out is in respect to American International Group.
This report is therefore aimed at performing a critical analysis of the fraud that has been carried out at AIG in its accounting process. The analysis involves an evaluation of AIG Group in particular with regard to the major practices that are carried out by the organization including its offerings and services, and this is followed by an analysis of the scandal methodology that has been followed in performing the scandal. The ways in which firm has been able to hide its accounting improperties will be assessed and it also includes an analysis of the major stakeholders that get affected as a result of it. Finally, recommendations would be provided in order to avoid similar kinds of improperties in future.
Overview of the Corporation: American International Group
An analysis of American International Group (AIG) indicates that it is a multinational insurance corporation that operates across the globe with around 88 million customers in its database. The company accounts for employing more than 64000 people across 90 countries. There are three major types of businesses that are currently operated by the company and these include AIG Property Casualty, AIG Life and Retirement and United Guarantee Corporation. These are the three important divisions that are noted in respect to AIG and they accounts for providing different insurance products and services to its customers. As for instance, AIG Property Casualty accounts for providing insurance products especially in respect to segments involving commercial, institutional and individual customers whereas AIG Life accounts for providing life insurance and retirement services to its customers. With regard to the UGC section, it focuses on providing mortgage guarantee insurance and mortgage insurance to its customers. Thus, the AIG Group as a whole accounts for providing insurance services of different categories to its larger customer database that is widely diversified, and its services are available throughout the globe.
Description of Scandal Methodology
An analysis of AIG Group indicates that accounting scandal has been carried out across the organization. In actually implementing the scandal, a specific methodology has been followed by the company. As for instance, the case analysis of AIG Group indicates that the company has adapted a methodology of accounting practices errors in accounting for transactions in its books of accounts. There are various such improper accounting that have been carried out in the books of AIG which has resulted into the accounting scandal. The main intention behind hiding important information in its financial statements is mainly to perform the manipulation of its true financial conditions. The analysis of the methodology as followed has indicated that the company has manipulated its accounting procedures and treatments for recording its financial performances in a manner that results into desired accounting effect to the company.
Thus, the methodology that has been considered at AIG is mainly the performance of accounting errors so that a desired view with regard to company’s performance can be achieved. This has been an important methodology that is involved in majority of the cases in the past whereby the management from top levels makes changes to the accounting methodology with a view to ensure overall gains. The accounting methodologies are manipulated with a view to represent the positive overall performance conditions of the company, but it ultimately leads to collapse or negative overall reputation of the company, and significant loss to the ultimate stakeholders of the firm. As in the case of AIG, it has been evident that the company itself has accepted finally that there are accounting errors in its books and these errors have negatively affected the image of the organization.
The analysis indicated that the specific accounting improprieties that have been utilized by AIG are mainly in terms of booking the loans as revenue in the books of accounts. The company has lower reserves in sufficiently paying up the insurance claims, and this has resulted into sourcing a loan of $500 million which has been recorded as revenue in the books of accounts. This has been the serious accounting impropriety that has been followed at AIG and it bolstered up its financial statements. It has boosted up its lower reserves in paying off its claims in a positive manner. The loans have been allegedly booked as revenue and this has affected the income statement figures as shown the by the company. Apart from this, there is other major clutch of accounting improperities that have been noted such as restatement of its past results as there were accounting errors being noted in respect to company’s financial statements (AIG’s Accounting Lesson, 2004).
Ways in Which AIG Managed to Hide Accounting Improprieties
The analysis above indicated that AIG has been faced with accounting frauds in its books of accounts and there are certain major steps that have been followed by the company in hiding its accounting improprieties. There has been a series of investigations that have been carried out at AIG in order to analyze the existence of frauds in its financial statements, and the conduct of analysis indicated that there are a series of frauds that have been made in the books of accounts of the company. As for instance, it has been analyzed that there has been overstatement of the financial numbers being performed across AIG in their balance sheet with a view to depict a stronger balance sheet figure. The steps as followed in adjusting the balance sheet indicates that there are various such errors that have been given due effect in the books of accounts of the company (AIG: What went Wrong, 2005).
It has been analyzed that AIG has represented the loans it has taken in order to meet out the insurance claims as revenue in the financial statement. The loan taken should be shown as company’s liability but in respect to AIG, in order to depict positive performance level of company, there are misstatements being done to the balance sheet by way of showing the loans as revenue. This has increased up the profitability performance level and the resulting impact is shoot up of profitability levels in the balance sheet of the company. Apart from this, there are certain other misstatements that have been appropriated in the balance sheet of the company with a view to disclose favorable overall performance levels. As for instance, another major step that has been undertaken at AIG was mainly the manufacturing of false contract for insurance. This has also been carried out with a view to indicate positive performance level of the company in its books. These are the major ways in which AIG has attempted to hide more than $11 billion of losses in its financial statements (Greider, 2010).
The reinsurance transactions have been improperly accounted in the books of accounts of the company with a view to bolster up the reserves of the company. In order to analyze the wrongdoing in the financial statements of the company, a series of investigation has been carried out in the books of accounts of AIG which leads to the identification that there are various major steps that have been considered by the company management in accounting for errors in its books of accounts. As for instance, the analysis of the case of AIG has indicated that the investigators have initially focused on two major transactions involving Berkshire Hathaway General Re Corp. unit. The deal has been amount to $500 million loan and it has been reflected in the books of accounts of the company as revenue. This has allowed the company in boosting up its revenue in paying up the insurance claims. The risks associated with insurance underwriting were never assumed by the company, and finally, it is acknowledged by the company that there has been improper documentation of the transaction being carried out and it should never have been classified as insurance income (Anderson, 2005).
The accounting improprieties as noted above have been properly hided by the company as evident from the case analysis. As for instance, the loan taken has been represented as revenue and this has been an important way in which the company claimed that it has sufficient reserves to meet out the requirements for claims that it needs to do payment. This way of recording the loans as revenue would not attract the attention of its stakeholders and this is considered as an important way of hiding the organizations losses. Because loans recognizing as revenue in the books of accounts have boosted up the profitability performance level of the company which in turn is reflected over the rising share prices of the company’s stock. However, with the identification of frauds after investigation at AIG, its stock has plummeted down and it has faced with fraud litigations (AIG finds more accounting errors, 2005).
Further, the case analysis of AIG indicates that the company has been successful in hiding errors in its financial statements for long number of years. As for instance, the case analysis of AIG indicated that the deals with Barbados based insurance company has been accounted for 14 years and there were errors that have been appropriated in the books of accounts of AIG for so many years. This has in fact questioned the effectiveness of the accounting firm that was responsible in performing the auditing of the company’s accounts (Tough Questions For AIG’s Auditors, 2005). A detail analysis of the case of AIG indicates that the company has utilized the sham accounting methodology for the purpose of inflating earnings in its books of accounts. There are two major sham reinsurance transactions that have been entered into by Gen-Re with AIG and these transactions were being improperly recorded by AIG as real reinsurance. AIG performs the false reporting of both the increase in the loss reserves and premium written. As a result of these transactions, it has been appeared as if AIG has increased its loss reserves which have not actually been the case (Warren, Reeve and Duchac, 2011).
These are the two major key performance measures that remained inflated in AIGs financial statements until a restatement has been issued by the company in 2005. There were no any economic substance of the transactions, but they were designed in a manner as if they appears to the true. Thus, the overall misstatements as carried out in the accounting policies of the company were aimed at reflecting an efficient overall performance level so that the company can maintain higher overall position within its investors. As a result, when the investigations were carried out, there has been restatement being undertaken by the company with respect to its performance level in the past years from 2002 to 2004 with a view to identify the losses that have been understated. This has been a case of major error in the history of accounting as the losses were hidden for such a longer period of time, and the company’s financial statements were misrepresented. The major question that arises from such issue is mainly related to the auditor’s responsibility in such case, as it has been the prime responsibility of the auditing firm to trace any such errors in the financial statements of the company (Canellos, 2008).
Overall, the analysis above indicated that AIG has been successful in initially hiding the losses in its books of accounts for so many years, and they have been traced when the actual investigation was carried out in 2005.
Who the Scandal Effected
An organization has large number of stakeholders that are directly affected by the activities that are carried out within the business. In respect to AIG, the scandal that has been carried out has affected large number of its stakeholders including the accounting profession also to a greater level. As for instance, the most important stakeholders of an organization are its customers and in respect to AIG as well, its customers are the most significant stakeholder that get affected as a result of such fraud within the organization. The case analysis of AIG indicates that it has been the senior level managers within the organization that have actually accounted for such loses and fraudulent activities that have been carried out. It is not only the management inside the company, but the auditors that are external to firm have also contributed in a positive manner towards the corporate frauds that have actually been accounted. As for instance, it is the prime responsibility of the auditor that the corporate frauds should be actually identified in the books of accounts of the company, and in respect to AIG, the auditor failed to do so (Canellos, 2008).
As a result of this, the organization has to face threats from its customers who have become the primary stake in the company’s performance. Since AIG is an insurance company and the customers across the globe have their insurance policies with the company. As a result, any kinds of fraudulent practices are therefore likely to impact directly to the customers, and this has been evident in respect to the given case of AIG whereby its customers are directly impacted from the frauds that have been detected. Apart from customers, it is the employees of the organization that have to face the litigation and in respect to the given case of AIG, the employees of the organization are also highly affected as they have the possibility of losing their jobs in the instance of failure of the company. The employees are internal to organization whereas its customers are mainly external to it. The contribution of employees is also crucial in effecting the fraud because they have not even reported the company’s undergoing. This is mainly because employees are clear about the actual position of the company, and despite losses, the AIG’s financial statements revealed positive reserves which needs to be brought into attention by its employees (Warren, Reeve and Duchac, 2011).
Thus, the analysis above indicates that it is the management at AIG together with its employees and the auditors in particular have effected the fraudulent practices across AIG.
Impact on Accounting Profession: With regard to the impact on accounting profession as a whole, such kinds of fraudulent practices have a direct level of impact over the performance of entire accounting profession. As for instance, the major negative impact is mainly in terms of sufficient accountability of the accounting profession at large, as there are various such stakeholders associated with an organization and it becomes essential that their stake should be protected. But such kinds of activities directly impact the effectiveness of accounting profession. The fraudulent practices within organization accounts for affecting the confidence level of people at large from the accounting profession. Further, the case of AIG scandal has also contributed towards measures in improving the accounting profession through enhancing the courses on corporate frauds as taught to students within universities.
Conclusion
This report involved a critical analysis of the fraudulent activities that have been carried out by the management at AIG and the performance of analysis indicated that it is mainly the top management that has accounted for such fraudulent activities in the books of accounts by way of hiding necessary details and also by making fraudulent accounting treatments for loans by recognizing them as revenue. The analysis indicated that the scandal was effected by the employees, management people and the accountants.
Recommendations in Avoiding Similar Accounting Improprieties in Future: Similar kinds of accounting improprieties can be avoided in future and this could be by way of having certain major policies and procedures into actions. The important recommendations needed in avoiding similar kinds of accounting fraudulent activities in future are indicated as follows:
- There should be whistle blower that should be emphasized within the organization from the point of view of restricting the top level managers within organization from indulging into any such fraudulent activities involving corporate accounting frauds (Salehi and Rostami, 2009).
- It is also recommended that there should be more than one accounting auditors that should be considered in auditing the books of accounts. This can be ensured by way of having internal auditors and also by way of accounting the firm’s books of accounts through external auditing firms (Healy and Palepu, 2003).
- The top level management should be made accountable for any major losses and there should be strict penalties that should be imposed on the management that involves into such corporate fraudulent practices. This would restrict them from thinking about involving into such frauds within their organization.
- It is also recommended that the owners or shareholders of the firm should also account for checking the books of accounts especially with respect to the areas of corporate expenditures and the profitability as made. The major project involving higher revenue levels should also be checked (Warren, Reeve and Duchac, 2011).
- It is also recommended that there should be a complete check of the company that should be performed in order to establish viability of the firms. It is essential that the company should be financially viable in carrying out the operations (Marx and Els, 2010).
These recommendations are considered important from the point of view of ensuring the fact that similar kinds of financial improprieties can be avoided from occurrence in future.
References
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