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Case Summary

In the annual report in 2004, AIG announced that the earning had increased by 12% and it
had increased its dividend payout by 67%. However, after that there were revised financial
statements that show the net income has fall by $1.3 billion (12%), and reduced the
shareholders equity by $2.3 billion (3%). This reacts the fall of its stock price by 25% in
2004.
The problems apparently was not only the statement announced in 2004 but also, after it had
been revised, happened in 2003 and 2002 which reduced the income by more than 10% for
the past five years. One of the causes came from many adjustments involved in AIGs ethical
climate. Certain of AIGs controls within its control environment were not effective to
prevent certain members of senior management, including the former Chief Executive Officer
and former Chief Financial Officer, from having the ability, which in certain instances was
utilized, to override certain controls and effect certain transactions and accounting entries. In
certain of these instances, such transactions and accounting entries appear to have been
largely motivated to achieve desired accounting results and were not properly accounted for
in accordance with GAAP (General Accepted Accounting Principles).
Several override noted resulted in:
1. Creation of a special-purpose entity to improperly convert underwriting losses to
investment losses.
2. Improper recording of reinsurance transactions.
3. Improper top-level adjustments and covered call transactions
4. Unsupported top-level adjustment of loss reserves.
The report on the past five years were restated indicates that these weaknesses were endemic
for some considerable period of time. These cases happened during the Maurice Greenberg
positioned as CEO of AIG, and he ruled with an iron hand, exercise complete control over
many details, and dominated the board of directors.
Greenberg reply the accused by issuing a white paper that had been audited by CPA
(Certified Public Accounting) firm, PricewaterhouseCoopers (PwC). Glass Lewis & Co., an
institutional proxy-advisory firm, find it disagree on the way PwC incorporate with AIGs
statement.
In 2005, the new CEO Martin J. Sullivan set forth major initiatives to rectify control
weaknesses. Under the category of Regulatory Matters, he affirms: We are working to
ensure that every employee in our organization upholds the highest standards. Also under
Regulatory Matters, he notes that all risk management capabilities have been centralized into
one risk management department. He also comments on ethics:
We have also strengthened our compliance function. Employees who have compliance
questions or concerns, or have a violation to report, can contact a Compliance Help Line .
We have augmented our ethics education program on a worldwide basis to reinforce the
standards set forth in our Code of Conduct. He reported that AIG has taken, and is
developing further plans to take, significant actions to improve its control environment,
starting with a clear statement of the tone and philosophy set by its current senior
management.

The Corporate Governance Committee Report in the 2005 AIG Proxy Statement gives further
details:
AIG enhanced its Code of Conduct for employees, mandated that all employees complete
formal ethics training, and implemented a Director, Executive Officer, and Senior Financial
Officer Code of Business Conduct and Ethics to provide reasonable assurance that all
members of the Board of Directors, executive officers, and senior financial officers adhere to
the stated principles and procedures set forth in that Code. At the Committees
recommendation, AIG is developing a corporate-level compliance framework, including
implementation of compliance programs at AIGs major business areas.
Problem Statements
It was clear that before 2005 AIG does not have ethical code of conduct which results in
financial mismanagement to do what ever they want on how they serve the financial
statement. It has been their tradition to manipulate the financial statement to meet their
desired results. Moreover, the former CEO and CFO still have the power to influence in the
management especially in making the financial statement. In addition, AIG had little or no
ethics training and no help/hotline, in spite of longstanding requirements for them in the U.S.
Sentencing Guidelines.
Because it was regulators such as the SEC (Securities and Exchange Commission) and the
requirements of Sarbanes-Oxley that triggered AIGs establishment of better compliance and
ethics programs, AIG seems to be embracing a more ethical structure only because of legal
requirements. Even though being ethical is not necessarily bring financial value to the
company but it will bring reward from employees, customers, vendors, investors, and the
general public.
If we see from the utilitarianism principles, its clear that the action can only benefit the
company but not the shareholders and it gives a bad impact to the company itself when the
restatement published. The action clearly shows that the senior management has bad intention
toward the company sustainability. Even though probably in their mind they will settle the
problem in the future, but it wont benefit the company and the share holders as a whole.
From the right and justice principle point of view, the senior management and the CPA has
done wrong and injustice act toward the company and the shareholders. The result of such act
was the mistrust of the shareholders. However, the case does not mention any penalties given
to AIG for such act.
The people and institution that enroll in these problems are:
- The former CEO and CFO who still and interfere with the reporting
- PwC who just acknowledge the statement that they know that it was wrong
- The shareholders who has been cheated for the report AIG made
- Glass Lewis & Co., an institutional proxy-advisory firm, that review the mistakes
AIG made.
Solution to the Problems
Several solutions has been written in the case that when the new CEO in 2005 Martin J.
Sullivan has been appointed, the Corporate Governance Committee Report in the 2005 AIG
Proxy Statement that AIG enhanced its Code of Conduct for employees, mandated that all
employees complete formal ethics training, and implemented a Director, Executive Officer,
and Senior Financial Officer Code of Business Conduct and Ethics to provide reasonable
assurance that all members of the Board of Directors, executive officers, and senior financial
officers adhere to the stated principles and procedures set forth in that Code. At the
Committees recommendation, AIG was developing a corporate level compliance framework,
including implementation of compliance programs and AIGs major business areas.

However, there should be more things that they can do, such as:
- Giving punishment and rewards
- Encouraging the customer or people to supervise their activities, this might become
the marketing strategies to bring the image of transparency and trustworthy.