Wei Kevin Luk
Kevin.luk@stmartin.edu
Wei Kevin Luk
Kevin.luk@stmartin.edu

AIG’s “LOSs Reserve” accounting Scandal 2005 AIG’s “LOSs Reserve” accounting Scandal 2005

Introduction AIG, American International Group Inc., is one of the top multinational insurance corporations. AIG, with asset of 556 billion, provides insurance service for more than 150 different countries and it has over 630, 000 employees over the world. Even though AIG is such a giant corporation, it has encountered financial problems in the early 2000s. Under financial pressure and a lack of internal control, AIG have committed frauds resulting in several scandals. One of the accounting scandals was disclosed during 2005 which involved a material …show more content…

Also, AIG secretly agreed to AIG
NUFIC
Asset
+ 10M Premium Paid by CDR
+ 490M Premium Receivable (withheld by CDR)
Liability
+ 500M Loss Reserve

Transection recorded by AIG:
AIG
NUFIC
Asset
+ 10M Premium Paid by CDR
+ 490M Premium Receivable (withheld by CDR)
Liability
+ 500M Loss Reserve

Transection recorded by AIG: pay General Re 5 million as a fee for doing the deal. Following GAAP (general accepted accounting principle), the nature of the transaction could not be classified as Loss Portfolio Transfer as there was no transfer of risk. However, senior managements of AIG and General RE agreed to engage in “non-mirror image accounting”, which NUFIC recorded the transaction as a Loss Portfolio Transfer, while CDR(General Re) recorded the transaction as a deposit which did not violate GAAP.
How CDR paid $10 million without paying
In order for AIG to pay General Re $5.2 million fees secretly and for CDR to pay $10 million in order to make the transaction believable and under the radar from investigators. Senior management of AIG and General Re constructed a paper trail which would hide the transaction of $5.2 million directly to General RE from AIG. There were existing contract between where General Re owned $31.8M payable to AIG. Therefore, General Re paid $7.5 million to commute an existing contract with AIG subsidiary, HSB. Furthermore, General Re paid NUFIC $9.1 million premium to reinsure