Arthur Levitt Should Just Shut Up About AIG
By Francine • Mar 25th, 2009 • Category: Pure Content, Writing for OthersMy new piece is up at The Huffington Post. It should be read alongside yesterday’s story on Lynn Turner. If these two start selling out the shareholder and the ideals of the accounting profession in all of the mess of the financial crisis, who’s left?
“Why did Levitt go to work for AIG again in 2007 after his stint there in 2005? Why did he help paper over their decision at the end of 2007 to re-appoint PricewaterhouseCoopers as their auditor, even after all of the messes PwC has presided over, been sued over and settled over, looked the other way on, and acted on only when forced by threat of more litigation?
Arthur Levitt and his AIG auditor selection committee didn’t fire incorrigible but complicit PwC at the end of 2007. They reappointed them so PwC could stay close and no other firm get closer once the investigations for 2007 activities started. It wasn’t long before the Department of Justice asked the SEC to turn over evidence as part of a criminal investigation of whether the material weaknesses in internal control cited by PwC in February 2008 were part of a fraud, one that their auditors didn’t “detect” until the subprime crisis heat was on.
PricewaterhouseCoopers earned over $120 million dollars as AIG’s auditor and tax advisor in 2007. Why is there no outrage by Mr. Levitt and the press over that outrageous waste of shareholders money? How could Matt Taibbi write an eight page article in Rolling Stone magazine this past week detailing the history of AIG’s issues and never once mention their external auditor, PricewaterhouseCoopers, by name? ”
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Francine McKenna (@retheauditors) has more than twenty years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad. For more info, click the "About" page link at the bottom of this page.
PwC identified and reported a series of material weaknesses at AIG , something you’ve been scream at the top of your lungs for months that no other audit firm was doing, and you’re calling them “complicit” for it? I think you should expand on this accusation further.
Also, citing Rolling Stone for your financial information? Really?? I subscribe to Rolling Stone, and still I say… REALLY???
@ClownCollege
I say “complicit” because of the length of time PwC has been auditing AIG and the number of times AIG has been in trouble, sued, and had investigations, fines and sanctions. PwC has even been sued and settled for their lapses with regard to AIG. They may have reported material weaknesses recently, but it was too little too late, as I discussed in my article. http://retheauditors.com/2008/02/pwc-tough-on-aig-too-little-too-late/
As far as citing the Rolling Stone article, I was being somewhat critical, in case you didn’t get it. And the article was very widely read and cited by many financial analysts and bloggers because it was exhaustive and had some new tidbits of information that had not been printed elsewhere. Good investigative journalists are writing for publications besides the WSJ. In fact, most of them do. The story in Rolling Stone was a good read and a good functional summary of all that’s happened, except for the fact that it left out a major player. Although, in reality PwC is a minor player, to the detriment of shareholders.
AIG is a very complicated story that I know a bit about. Many of their businesses are sound and will be sold off to repay the taxpayers. AIG destroyed their business on the back of “risk free” credit default swaps and other derivatives. Maybe PwC should have seen the crisis coming, but if they had, they would have been the only ones. It is also worth noting that the SEC has not suggested that any AIG audited financial statements need to be restated. Blaming the auditors is an easy out – the real problem has nothing to do with audits. It is all about the basic flaws in our financial regulatory system. Lets hope the President can fix it.
I agree with #3…auditors had very little to do with this crisis….we are not in 2002 anymore. I like your writing FM but the complete lack of anyone else accusing the auditors makes me think you might be wrong on this one. Why not write about PWC in India more. There is a story. I think you are looking for culpability where it doesn’t exist.
Francine:
Suppose PWC got fired? What then? Do you want KPMG which audits Citigroup in there? Or would you prefer Ernst, or Deloitte? It doesn’t matter. Each Big 87654 firm has skeletons in its closet amongst bailout beneficiaries. Ernst is working for the Treasury right now. Would Ernst report any improprieties at AIG if Treasury was involved? The Big 87654 cover up for each other and the powers that be. That’s the bottom line. I trust no Big 87654 firm’s aduit of a financial institution.
Terry Fox:
You and I live in different worlds. That the SEC has or hasn’t done anything, means nothing to me. I saw the CDS crisis coming years ago. Really. Would the SEC say AIG should restate, if that would implicate Treasury and Goldman Sachs in effecting a bankruptcy fraud, 18 USC 152? Are you serious? Did you follow the Madoff fiasco? Markopolos gave the SEC a road map, which it couldn’t follow. Doing SEC work and having weekly contact with it, I conclude the SEC is staffed with “box ticking” economic ignoramuses. The then Big Eight firms didn’t see the 1979-86 S&L crisis. I did. Why? Mismatched maturities. Did the OTS warn the S&Ls about what they were doing? The flaw in our regulatory system is: moral hazard. I have a reading suggestion for you, “The Politics of Industry”, by C. Walton Hamilton, 1957. You might learn how the system works. The SEC let the investment banks lever up from 12 to 1 to 35 to 1. You want the SEC to have seen AIG coming? Get real. Goldman and the other players gamed the system, knowing they could pass losses off to the taxpayer, “laundering” them through AIG. That’s the bottom line.
@ Independent Accountant: Dude, considering you saw both the S&L crisis and the current credit crisis coming, you must be loaded. If you were smart enough to forsee two major debacles that noone else in the financial community saw coming, I’m guessing you must have been smart enough to short all the financials or at least buy some puts on the financials. If so I tip my hat to you, you an a very small group of hedge funds have made a killing…
That is unless your full of it, and by “I saw the CDS crisis coming years ago” you mean you thought maybe prices were getting inflated and now in hindsight you see there were signs of the crisis building.
Anonymous:
I am not full of it at all. I didn’t short the financials. I NEVER OWNED ANY. Never. I have learned manias, like we saw in the financials, or tech stocks in 2000, can go on for YEARS longer than you think. I saw the S&L crisis coming in 1973-74. It was a VERY easy call. Why? Do you know what mismatched maturities are? I read a treatise on banking from Amsterdam which warned bankers against this. Publication date: 1587, 422 years ago! Are you a “bookkeeper” masquerading as a CPA? By the way, lots of people at Chicago saw the S&L crisis as inevitable by 1973-74. Inevitable!!!! On a “fair value” basis, the S&L industry was underwater by about $70-$80 billion by 1973-74. You seem to be an economic ignoramus. What do yo do for a living? The CDS crisis arose from insurers selling credit default swaps. This is and was an uninsurable risk. Why? Unlike life insurance, there is no actuarial information you can use to price the risk. Further, CDS show high “correlation”, they are not “independent” in default statistics. I think you are confusing CDSs with CDOs, collateralized debt obligations. By the way, I sold my condo in Los Angeles in December 2006, near the peak of the market. Really. I can show you the closing statement. With Los Angeles residential real estate at 210 months rent, that was an easy call too. Do you know what a capitalization rate is? I saw commercial real estate in LA with 3.5% cap rates in 2005. Really. In April 2005, Donald Trump appeared at a real estate convention in LA that attracted 40,000. 40,000! Seeing this, I knew the end was coming soon. You can read about Trump in “Fortune” magazine.
Do I blow some? Yes. No one calls ‘em all. I did not predict oil would fall from $147 to $35. But it did. So? And I took a beating on oil field service stocks. I ask again, what do you do for a living? Are you a $700,000 a year clerk Big 87654 partner who purports to audit banks? Do you even trade stocks?
I have a suggestion for you. Start reading the Unqualified Reservations blog by Mencius Moldbug (MM). MM is a fine analyst, even if frequently prolix. If you read MM for a few years, you might begin to realize how little you seem to know. Another suggestion, Steve Waldman’s (SW) Interfluidity. SW is another fine thinker.
Independent Accountant – you are the smartest guy in town, if you do say so yourself. LOL
One big fat question for everybody..when has it become the auditors responsibility (fiduciary or otherwise) to tell an audit client which products to build, which products to invest in, how to build their products, and/or which customers/consumers to do business with? The question then becomes, did the auditor perform their function “…to provide reasonable (NOT absolute) assurance that the FS were prepared in accordance with GAAP?” And, isn’t the stock market just rich persons gambling anyway?
The SEC happens to be dysfunctional. And Independent is right that anything from the big 4 is not trustworthy.
The question is, who do you trust in this world?
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