The Great American Financial Sandwich: AIG, PwC, and Goldman Sachs

By • Feb 2nd, 2010 • Category: Latest, Pure Content, The Case Against The Auditors

It may have been the first time you had ever heard of AIG.  As big as it is, it wasn’t really a household name outside of the financial services world.  And certainly, big as it is, the average businessperson probably could not describe everything they did and why.

The Wall Street Journal, September 16, 2008

The U.S. government seized control of American International Group Inc. — one of the world’s biggest insurers — in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

The U.S. negotiators drove a hard bargain…

Can you fault the journalists for not having any idea how incomplete and relatively inaccurate so much of what was written in haste back then would turn out to be?

The Washington Post, January 26, 2010:

The federal bailout of AIG, which grew to a more than $180 billion commitment, has attracted controversy and hounded Paulson, Geithner and other officials who helped orchestrate the troubled insurer’s rescue in September 2008.

In hearings last week before Congress, Treasury Secretary Tim Geithner came under fire for the bailout, given his prior role as Chairman of the New York Federal Reserve Bank, the chief architect of the deal:

From The Guardian, January 27, 2010

The US treasury secretary Timothy Geithner was accused of incompetence, obfuscation and of making “lame excuses” during a furious hearing on Capitol Hill over the government’s contentious bailout of the sprawling insurer AIG.

In an unusually ill-tempered confrontation, members of Congress from both parties rounded on Geithner over a decision to use taxpayers’ money to pay out the full $62bn (£38bn) owed by AIG to banks such as Goldman Sachs, Merrill Lynch, Barclays and RBS… The biggest counterparty receiving money from AIG was Goldman Sachs. Visibly rattled, Geithner was obliged to confirm to the committee that his chief of staff, Mark Patterson, is a former ­Goldman Sachs banker, as is Geithner’s predecessor at the treasury, Henry Paulson. But he angrily defended those involved…”

But if you’ve been reading my stories about AIG and their auditor PwC, you would have first heard about AIG in 2007. I start with their earlier accounting issues, restatements, investigations and lawsuits as a result of, let’s call it, Crisis One, to differentiate it from Crisis Two – the $180 billion bailout that became necessary, suddenly, unexpectedly, as a result of a confluence of unprecedented economic events and that could not have been anticipated by anyone, anywhere, in any way shape of form…

Yeah, right.  If you believe that, Joe Cassano’s got a great deal for you on a piece of Maiden Lane III.  Sounds quite green and leafy, no?

In June of 2007, I told you about former AIG Chairman and founder Maurice Greenberg suing AIG and PwC as a result of a shareholders derivative suit against him. I said, “Isn’t it time for PwC to resign as AIG auditor?”

In August of 2007, Greenberg’s firm C.V. Starr…

“…which remains an AIG shareholder—alleges in its petition [to the SEC] that AIG’s longtime independent auditor should be forced to resign because an AIG special litigation committee earlier this year authorized shareholders to pursue a derivative action against PwC in Delaware Chancery Court. “AIG’s decision to have the derivative plaintiffs prosecute the claims against PwC on behalf of AIG instead of having AIG’s own counsel prosecute the claims cannot eliminate the conflict that exists,” the Starr petition says.”

In October of 2007, I told you how PwC was sued by AIG shareholders who filed an amended complaint because when AIG management took over the shareholders derivative suit, stepping into their shoes, they did not comply with their wishes and decided to not sue PwC.

“…filed in Delaware Chancery Court on Friday. AIG shareholders previously sued in 2004, naming former Chief Executive Maurice “Hank” Greenberg, former Chief Financial Officer Howard Smith, PwC and others as defendants. In the amended complaint, filed on Friday, the shareholders seek damages from PwC and others…

In June, AIG took over the shareholders’ lawsuit against Greenberg and Smith, becoming sole plaintiff in the case and leaving shareholders to decide whether to pursue claims against some or all of the remaining defendants, including PwC.

AIG, the largest U.S. insurer, on Friday restated its claims against Greenberg and Smith for allegedly breaching the fiduciary duties they owed the company, while shareholders refiled their claims against some of the original defendants. AIG “decided not to sue (PwC) based on the recommendation of a special litigation committee of AIG’s board of directors” and the company “continues to have full confidence in the independence of PwC,” a company spokesman said…

Also in October 2007, in spite of their role as a defendant in lawsuits by AIG shareholders, in spite of their longstanding relationship with the firm that was now in so much trouble, PwC was reappointed as AIG’s auditor, with the endorsement of Arthur Levitt. Levitt had been hired by AIG to restore good corporate governance to AIG.

Bloomberg, October 11, 2007:

The company interviewed at least three others over the course of a year for the job, which starts 2008, said AIG spokesman Chris Winans.

PricewaterhouseCoopers, AIG’s auditor for more than two decades, had approved financial results from 2000 to 2005 that were restated amid Spitzer’s probe, lowering earnings by $3.4 billion. AIG investors sued the auditor in a Sept. 28 amended filing to recover losses from the settlement and restatement.

“Many companies involved with corporate scandals have changed their auditors to regain investor trust,” said Lynn Turner, a former chief accountant at the U.S. Securities and Exchange Commission. … “disappointed” AIG kept “the auditor who failed investors by giving a clean bill of health on misleading financial statements.”

PwC gets reappointed as auditors, so that a few months later, they can tell AIG what a screw-up they’ve been. In my opinion, it’s too little too late.  But what’s really going on here?

Crisis One litigation is still very much alive. After PwC’s material weakness determination in early 2008, for the 2007 financials, there was an attempt to amend the ongoing suits to include a CDO/CDS cause of action.  Research to support this request showed that PwC had been dealing with closely related accounting issues as far back as 2002, centered mostly around EITF 02-3 valuation issues. The research revealed deep, longstanding internal controls issues that were now becoming painfully apparent.

Between Crisis One and Crisis Two (i.e., the 2004 and prior accounting irregularities that ousted Maurice Greenberg, and then the 2007 AIGFP mess), the players on both the AIG management side, and the PwC engagement team side, were pretty much totally traded out.

On the PwC side, Global Relationship Partner Barry Winograd and Engagement Partner Richard Mayock stepped down after the 2004 audit year and Tim Ryan and Mike McColgan took over as Global Relationship Partner and Engagement Partner, respectively. The AIG Expanded Scope Audit, for 2004 and prior, was a Herculean effort for PwC, involving a tremendous amount of interface with AIG’s own internal review, the attorney investigations led by law firms Paul Weiss and Simpson Thacher, as well as ongoing regulatory inquiries.

PwC had to pull out all the stops to come up with enough staff to complete the task – this was Sarbanes-Oxley prime push period and resources were constrained and at a premium. Although Greenberg loudly disagreed at the time, sources tell me most of those who had been, and were then, key members of the engagement team, left the engagement.  While the change-outs at the top were largely political, many of the changes down in the ranks were people who were completely burned out on AIG, and unwilling to continue on that engagement.

At AIG, those managers such as Cassano not affected by Crisis One head chopping, were still in place, and the derivatives business largely missed out on any magnifying glass treatment as a result of Crisis One.   Based on documents obtained during discovery related to Crisis One, it was clear PwC the firm was really red faced that they’d “missed it.” When the replacement audit team moved forward, and then the rumblings of the CDO/CDS mess started being heard, PwC press releases coming out in February 2008 gave the impression that the firm’s leaders were not about to be caught asleep at the wheel again. They threw the “material weakness” flag quite quickly.

And then you read the Washington Post article about the now revealed 2007 internal AIG emails, and follow the timeline in 2007. In retrospect, it’s easy to see that by summer 2007 AIG management had a pretty good idea its risk of drawdowns on the CDS’s is way more likely than the “less than remote” characterization in the footnote description of prior years’ financial.

How much of that early realization got on the PwC new engagement team radar? How many other big things did they miss or pretend not to see?

An AIG presentation dated Nov 2007 was still totally minimizing any prospective increase in risk.

It was during 2007 that AIG’s conflicts with Goldman Sachs over collateral for the CDOs became heated.  I wrote in December, based on reports by Andrew Ross Sorkin in his book, Too Big To Fail:

AIG had publicly disclosed the existence of a collateral dispute with Goldman Sachs over CDOs in November of 2007… AIG Chairman of the Board Bob Willumstad, according to Sorkin, not PwC, originally raised red flags in January 2008 regarding the growth of the collateral gap. Willumstad called in PricewaterhouseCoopers to review the situation and,

PwC eventually instructed AIG to revalue every one of the credit default swaps… and embarrassingly disclosed that it had found a “material weakness” in [AIG’s] accounting methods.”

…AIG “admitted” that their management may have held back or even lied to the auditors.  AIG had actually given PwC an out, I said, to keep them close in the event of litigation or worse…A few pages later, on page 175, Sorkin describes a Goldman Sachs June 2008 board meeting where the issue of their collateral dispute with AIG boils over.

“In a videoconference presentation from New York, a PwC executive (PwC is Goldman Sach’s auditor, too) updates the board on its dispute with AIG over how it was valuing or in Wall Street parlance, “marking-to-market,” its portfolio. Goldman executives considered AIG was “marking to make-believe” as Blankfein told the board…the afternoon session proceeded with upbraiding PricewaterhouseCoopers:

How does it work inside PwC if you as a firm represent two institutions where you’re looking at exactly the same collatteral and there’s a clear dispute in terms of valuation?”

How does it work, indeed.  Jon Winkelreid, Goldman’s co-president, may or may not have received an answer that day. Sorkin does not report one.  I have never heard one.

It must be tough to be PwC, wedged between two powerful, lucrative, and equally complex clients. The money they’re raking in provides some solace, I’m sure.

Reuters, July 1, 2009

AIG paid PwC a total of $131 million in audit and other fees in 2008 and $119.5 million in 2007. ”I want to know what these fees were paid for,” shareholder Kenneth Steiner of Great Neck, New York said. “Why didn’t anybody know what was going on? What were the accountants doing? Were they sleeping?”

For Goldman Sachs, PwC provides not only audit, audit related, and tax advice, they also provide similar services to other entities managed by Goldman Sachs subsidiaries. For 2008, those fees totaled $99.9 million.

Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56.0 (2008) $49.2 (2007)

Audit-related fees (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      4.1              3.0

Tax fees (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1.7               2.3

All other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      — — — —

PricewaterhouseCoopers LLP also provides audit and tax services to certain merchant banking, asset management and similar funds managed by our subsidiaries. Fees paid to PricewaterhouseCoopers LLP by these funds for these services were $38.1 million in fiscal 2008 and $29.5 million in fiscal 2007.

Regardless of the fact that PwC is making more from AIG right now, both clients are critical and they’re hanging on to both tightly. So it’s not surprising, under those circumstances, that PwC tries to minimize conflict with either unless absolutely necessary.  In fact, even though they may have been taken to the woodshed by both in the past, they’ve escaped any significant public criticism for staying quietly and peacefully in the middle, neutral like Switzerland, when it comes to the disputes and conspiracy theories  about the relationship between the two firms and each with the NY Federal Reserve Bank.

It may be that PwC has learned to play both clients like a fiddle from professional dancing bears like Arthur Levitt. As we discussed earlier, Levitt played a significant role in getting AIG past most of the New York Attorney General’s scrutiny after their actions against AIG.  Part of that healing process included reappointing PwC as auditor.  But Arthur Levitt is also a paid advisor to Goldman Sachs. The Wall Street Journal did not mention his prominent role with AIG when they published a fawning homage to Levitt from Lloyd Blankfein.

And we’re not often reminded post- “Goldman Sachs making out like a bandit as a 100 cents on the dollar AIG counterparty” of the strange choice of Ed Liddy as CEO of AIG to replace Mr. Willumstad of “make PwC revalue the CDO’s and issue a material weakness in internal controls” fame.

The Wall Street Journal, September 16, 2008

By tapping Mr. Liddy as AIG’s next CEO, the government is turning to someone with deep experience in the insurance industry, having served as chief executive of Allstate from 1999 to 2006….Mr. Liddy also has experience pulling apart empires, having helped dismantle Sears, Roebuck & Co. (from which Allstate was spun off) in the 1990s. Before joining Sears, Mr. Liddy worked under Donald Rumsfeld at drug maker G.D. Searle & Co. Mr. Liddy is on the board at Goldman Sachs Group, the investment bank that Mr. Paulson led before becoming Treasury Secretary.

Maybe PwC didn’t stand a snowball’s chance in hell to be a truly independent, objective advocate for shareholders by forcing a true and fair presentation, in all material respects, of the financial position of either one of these companies and the results of their operations and their cash flows in conformity with accounting principles generally accepted in the United States of America. But is there a truly good excuse for PwC to not have been a preemptive strike force, a beacon, an early warning system for shareholders of the financial Armageddon we faced? They had longstanding, thorough, perfect knowledge of both sets of financial statements.

Add to this perfect knowledge the additional capital markets insight PwC has given their audit relationship with other large global financial institutions such as JP Morgan, Bank of America, Freddie Mac, Fortis, Barclays, Northern Rock…

Well, you get the idea.

Why didn’t PwC speak up, act more strongly to match mismatched valuations between entities like AIG and Goldman Sachs, raise their hand and shout fire, or at least warn of suffocating black smoke obscuring woefully inadequate risk management and of pricing “models” strung together like so many holiday lights electrical cords, faulty wiring and all, ready to blow the circuits?

Was it the fees?

Well, there’s certainly $230 million plus reasons in 2008 to play nicey-nice between the two clients.  But that explanation would be too simple.

“ Yves” at NakedCapitalism.com described the syndrome well when referring to the New York Federal Reserve and their lousy deal with AIG.

No matter which way you look at it, the picture that is emerging of the Federal Reserve, as revealed by the ongoing probes into its AIG bailout, is singularly unflattering.

The explanations for its actions can only support one of two interpretations: that the Fed was a chump, taken by the financiers, or a crony, and was fully aware that it was not just rescuing AIG, but doing so in an overly generous way so as to assist financial firms in a way it hoped would not be widely noticed or understood.

I wrote similarly about PwC with regard to the Satyam fraud.

The dilemma for the PwC Global senior leadership “crisis team” now in India is that the answer to the burning question, “How could Price Waterhouse India let this happen at Satyam?” has four possible answers:

a) Price Waterhouse India audit technique and “quality” standards demonstrate the epitome of incompetence and professional negligence,

b) Price Waterhouse India partners colluded with Satyam management to commit the fraud,

c) Price Waterhouse India partners were “duped,”

d) Some combination of all three.

None of the answers will win PricewaterhouseCoopers  International Limited a prize.

For an example of incompetence, over and above that which PwC and their client have already admitted to, let’s talk about one element of PwC’s audit process at AIG.

From a source:

Staff Accounting Bulletin No. 99 talks about that elusive concept of “materiality.”  In its guidelines, SAB 99 says an omission or misstatement of an item in a financial report is material “…if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”  i.e., qualitative materiality.

The element of auditor judgment and adequate subjective “professional skepticism” was lacking, and it allowed the frauds leading to the 1999-2004 restatements, as well as the head-in-the-sand failure to identify the impending catastrophe being created in AIG Financial Products with the CDS / subprime derivative products.  Year after year, the applicable boilerplate footnote in the financials continued to characterize the risk of ANY claims on those products, for the Super Senior tranche AIG was insuring, as “less than remote.”  Until, of course, it was too late.

In workpaper after workpaper, PwC whizzes past areas that subsequently became problematic, by relying on the failure of the item to reach the established level of QUANTITATIVE materiality alone, with inadequate subjective analysis of the qualitative.

It’s particularly ironic that, in the AIG/PwC assessment of “remediation” needs during the Restatement — which resulted in termination of a number of AIG execs, and demotion or reassignment of others away from responsibilities for financial reporting — Joseph Cassano at AIG FP was given a clean bill of health and allowed to continue unabated down the path toward disaster.  If ever there was a time when “looking under every rock” for more rattlesnakes was called for, it was during the 2005 Restatement.  The fact that PwC failed to get even a sniff of what was coming a couple of years later from AIG FP — even after deploying DA&I and dozens of extra auditors to handle the “Expanded Scope Audit” for 2004 — is very sobering, and brings into question (as you regularly do) why audits and investigations are even bothered with.

I don’t think PwC is a complete dupe for AIG and Goldman Sachs any more than they were in the Satyam fraud case in India.  I heard rumors in December 2007 that Goldman Sachs was thinking of dumping PwC.  Who knew then how angry Goldman was at PwC for their client AIG’s intransigence on the collateral call?  But it all worked out, didn’t it?  I guess Goldman decided, “Keep your friends close….and your lackeys closer.”

Hell, Goldman Sachs is citing PwC’s audit of AIG when criticized as having been unfair and disingenuous in its dealings with AIG.

Bloomberg, January 9, 2010

Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported… “Mr. Greenberg appears to base his views on news reports rather than facts,” Lucas van Praag, a Goldman spokesman, said in an e-mail to Bloomberg News. “It is interesting that he doesn’t mention the devastating conclusions about AIG reached by the company’s own auditors [PwC].”

I asked Mr. Praag about that comment.  I was surprised and pleased at the mention of an auditor in this context.

Dear Mr. Van Praag,

I found it curious that you cited AIG’s auditors, PwC, in response to criticism of Goldman Sach’s role in the AIG failure. Yes, PwC had something to say, in my opinion too little too late, on AIG’s weaknesses.  But PwC is still AIG’s auditor.  And PwC is also Goldman Sach’s longtime auditor.

Regards / fm

Dear Ms McKenna:

I was talking was about Mr Greenberg’s criticism of Goldman Sachs in its relationship with AIG and making the point that his opinion seems to rely on hearsay (news reports) and not facts.

Further, his remarks about his former company appear to ignore the fact that, in Dec 2007, PwC, its independent auditors, found that AIG had “material weaknesses in its internal control over financial reporting and oversight relating to the fair valuation of the AIG FP super senior credit default swap portfolio.” This seems to me to make Mr. Greenberg’s comments about our valuation of instruments protected by AIG bizarre, to put it very mildly.

Regards / Lucas

PwC has been walking a tightrope between these two powerful clients for a while.  But never doubt that they are, at the same time, always looking out for their own interests. Consider the class action lawsuit against AIG, PwC and others brought by the Ohio Attorney General on behalf of the Ohio Public Employees Retirement System as a result of Crisis One (the 1999-2004 issues). It’s an exquisite example of shrewdness necessitated by incompetence. The case is still moving through the courts and expected to go to trial sometime this year.

Back in October of 2008, PricewaterhouseCoopers agreed to pay $97.5 million to settle this litigation. At the time, the Ohio Attorney General’s office stated that the $97.5 million settlement was “one of the 10 highest settlements to be paid by an accounting firm to settle a securities fraud class action.”  The case was filed back in 2004.

Only one problem…  The class has not yet been certified and the settlement has not yet been finalized.

However, after “settling” with Ohio and extricating themselves unofficially from the suit, PwC quietly agreed to “flip” its witnesses to benefit the plaintiffs while continuing to serve as AIG’s auditors. Messrs. Winograd and Mayock were recently deposed, in support of the plaintiffs.

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40 Responses »

  1. 2. It isn’t one engagement team’s job to confer with anyone about how assets are being valued. This would actually be seen as inappropriate at best by most auditors, which is what it seems you say should have been done.

    2. CDOs, CDSs, MBSs were all valued much higher during the summer of 2007 than you are claiming. There was also much hope going forward (and analysis to support) that their values would rebound.

  2. @Tommy tom

    You are deeply naive if you think that partners at the GRP and EP level do not confer about methodology, approach, and technical issues related to clients in similar industries and with similar technical accounting requirements. (They even do it across firms via their SEC/GAAP consulting teams.) And both of these engagements are run out of East Coast/New York. They probably discussed it in places you would least expect. I have another post planned that touches only on these issues from a practical engagement, practice, and firm management perspective.

    As far as the hope and analysis that supported higher valuations on these instruments during the summer of 2007… Well, I think we know what that was worth. Looks like it was universally misplaced and wrong.

    Francine

  3. […] indictment of PwC’s conflicted role in AIG affair from […]

  4. Excellent coverage Francine.

    I am astounded by the perception of independence that the firms still try to project to stakeholders and investors. Public accounting is a profit driven business to support the partner lifestyle.

    As time goes on, more people realize that greed drives public accounting as much as any other business.

    I do feel accountants should be on a higher ethical plane, but they are merely human.

  5. @Tommy tom

    Just how many PhD’s with CDS valuation expertise do you think PwC has lying around in New York? The valuation of these instruments and the testing of the assumptions would (I hope) have been sent to a centralized derivative valuation group to review and test. Such a team would have had (again I hope) a fairly standard set of guidelines and testing approach regardless of the team sending it. After validating the inputs, they would have likely put it through their own sausage machine / valuation tool and compared the results. I think there would be a high probability that the same analysts would have been reviewing the same instrument for both GS and AIG. And when they notice that GS is using market derived inputs for the referenced MBS while AIG is using the historical average default rates and ignoring the market you would have hoped they might speak up. And when the partner (finally) heard the rumblings of a problem, even after it has been filtered through the manager / senior manager “make-it-go-away” screen, he would have asked “who else deals with this cr_p in the firm? GS… ah, [insert name of old white guy here] is an old buddy of mine, I’ll just give him a call and ask him what they do…”

  6. […] Posted February 3, 2010 Filed under: Brief Comments | Tags: Accounting, TBTF | After reading Francine McKenna on PwC, I have a proposal that would be of extraordinary value in helping shareholders understand […]

  7. Francine:
    Way to go girl. I’ve been posting on the AIG-GS-PWC fiasco for two years now.

  8. Francine:
    Thank you for the post. That main picture of the 3 sandwiches says it all. It looks good by the look and yummy, but very bad for your health. I think the main and big media are slacking about this issue. Hey! the economy is coming back. who cares?

    We have not done enough exposing this fiasco.

  9. @Dallas CPA

    Thanks. I am very, very serious about the photos and videos/music. Sometimes I write a story just because I find a great image. ;)

  10. FM,

    Being naive has nothing to with with thinking that all partners do not confer regarding methodology, approach and technical issues for their audits. Some do, some dont. You also know that partners do not audit, they oversee the results…barely, at times. Assuming the staff and managers that do all of the real work would have thought to / had time /wanted to compare the analysis of valuation is just a poor assumption. The valuations were given to them, approved, and they moved on. Thats how audits go. You know this.

    To your comment regarding “knowing what their valuations were worth”. Yes, they were wrong, but just about everyone was wrong. As you said, the analysis and hope were missplaced and wrong, but the conditions that caused the downturn were missed by everyone, not just the few you call out. I also will just reference Black Swan here, I assume you or anyone else reading this understands the reference, so no need to dive in. You seem to be one of the many attempting to blame rather than assist in making sure it doesn’t happen again.

    To Casper,

    As long as the valuation is legal, accurate based on the assumptions and calculations referenced, and complies with standards set forth by regulating authorities, that is all that matters to the auditors. You are comparing a pipe dream to the real world. It is all about getting the revenue, getting through the audit, and being able to blame others if anything goes wrong. That is how real audits are run, and until a regulating authority can make it so that isnt legal, it wont stop.

  11. 1 – Thank you for returning to journalism. Some of us were worried there for a second.

    2 – Never answered decisively. Is an auditor proactively seeking signs of fraud and accurate $$ values, or strictly just adherence to standard.

    3 – Was the original purpose of the auditor to assume the liability (i.e. his neck) from the auditee if he signs off, that the actual number of barrels coming off the skimmer in Liverpool is DAMN sure the same number of barrels loaded up in China. The slightest doubt, the auditor doesnt sign. No signed audit, big loss for the shipper. He does sign and a discrepancy is discovered, the auditor pays (ouch). Those quills must have felt like they weighed a ton.

    Does that capture the missing element in the US legal quagmire? Everybody has protected themselves to the hilt, and a bigger disaster than AA is needed to move anything. PwC, AIG, GS seem to be continuing the cycle unabated, not changing or reviewing on their own initiative.

    Not an auditor (already guessed?) but trying to read up as best I can. Read many excellent posts here.

  12. FM — Way to hit the nail on the head.

    Testy Conflict With Goldman Helped Push A.I.G. to Edge – 2/6/2010
    http://www.nytimes.com/2010/02/07/business/07goldman.html?hp=&pagewanted=all

  13. Wait wait wait… You think its ok for an accounting firm to make valuation adjustments or audit opinions based on confidential information from other clients that are in business arrangements with that client? That’s ridiculous. If PwC audits Dell and HP and they know HP has a new device that will take away significant market share from Dell should they issue a going concern for Dell?

    This smells like a witch hunt.

  14. To Private Dancer: The issue for PWC is whether it can agree to two different sets of values for the same swaps and I can’t see how it can. It turns out that Goldman wanted AIG to accept Goldman’s valuations for the swaps that were agreed to by PWC. For example, if Goldman says that they are owed $5 billion and AIG says that are owed $1 billion, I can’t see how PWC could have accepted both valuations. I don’t think its an issue of using confidential information. The normal review of litigation would have indicated that Goldman was claiming a substantial amount more than was on the books at AIG.

    Off topic-There were a lot of objections raised by AIG to the claims made by Goldman. The more you look at that those objections, the worse Hank Paulsen & Co. looks.

  15. I wanted to add more about another financial fiasco. The Swiss banks protecting all these criminals. It looks like they agreed to give the names at first and now they have some second opinions. It is time that someone reminds them that they don’t even have a choice. Please!

  16. I am looking for a copy of a report prepared by Deloitte/KPMG for AIG as part of their remediation efforts for the material weakness reported in February 2008. It was called “AIG Financial Products Corp. Valuation Remediation Plan.” If anyone can send me a copy would be much appreciated.

    I’m also looking for more PwC Goldman Sachs audit team partners/members to chat with.

    Thanks.
    Francine

  17. Francine appearing on Huffington Post.

    Same article, different sets of comments. Just an observation.

    Q: Which regulatory authority would be the unltimate venue to look at this. SEC, Justice department, neither?

  18. To David,

    Yes, they can, as long as both fall into categories and methodologies of valuation that are deemed legal and appropriate.

  19. […] told you in my previous post that AIG had been struggling with issues over valuations for a while. “AIG Crisis One […]

  20. […] of my commenters explained it: Just how many PhD’s with CDS valuation expertise do you think PwC has lying around in New […]

  21. […] them that might lead to their demise, no matter how well deserved it might be. Francine McKenna has written at considerable length about the fact that PwC was auditor to both Goldman and AIG, and was clearly signing off on […]

  22. […] The Great American Financial Sandwich: AIG, PwC, and Goldman Sachs – Fraud, fraud, fraud. Again. […]

  23. […] PwC, as AIG’s auditor as well as Goldman Sach’s auditor, was sitting smack dab in the middle of the valuation and fateful collateral dispute between the two firms; […]

  24. […] is an AIG Crisis One case. According to comments from Grant & Eisenhofer on the case: The auditor in this case […]

  25. […] and more often will play Switzerland, staying neutral as long as possible, like PwC did between AIG and Goldman Sachs in one of the most notorious disputes of the financial crisis. Better, yet, just keep them out of the loop and everyone will be […]

  26. […] practice group at Deloitte and operate out of the same geographic area.  Just like in the PwC relationship with AIG and Goldman Sachs, it defies credulity that the team leadership wouldn’t talk to each other and to their industry […]

  27. […] because the alleged “bad guys” tried to hide their bad actions from PwC. (This is even though PwC settled for $97.5 million with the Ohio Public Employees Retirement System in a related […]

  28. […] the alleged “bad guys” tried to hide their bad actions from PwC. (This is even though PwC settled for $97.5 million with the Ohio Public Employees Retirement System in a related case.) “We had auditors in this […]

  29. […] that it go on somebody else’s balance sheet as a countervailing liability.  AIG is just an illustration of how the accounting for such CDOs takes […]

  30. […] PricewaterhouseCoopers has been playing consigliere to AIG for many, many years and continues to be allowed to act as their “independent” auditor in spite of the fact that they have been sued by AIG’s shareholders and are now turning their own partners against their client in court. […]

  31. […] is evidence of only one interview with a Big 4 partner, Tim Ryan of PwC regarding AIG. The fruits of that interview seem to be only a “CYA” statement referring […]

  32. […] The Great American Financial Sandwich: AIG, PwC, and Goldman Sachs […]

  33. […] Treasury married KPMG all over again because they’re cheap compared to what Goldman and AIG are paying PwC, for […]

  34. […] with significant legal issues in the US. KPMG has an upcoming trial for the New Century collapse. PwC is still being sued by angry AIG shareholders. Deloitte has plenty to do defending themselves […]

  35. […] the material weakness, Deloitte supposedly did much less. The firm is comfortable  – like PwC at AIGor KPMG at Citigroup – in the knowledge that the U.S. Government would never swap it out […]

  36. […] that it go on somebody else’s balance sheet as a countervailing liability.  AIG is just an illustration of how the accounting for such CDOs takes […]

  37. […] the case of AIG, PwC partners agreed to testify against their client in exchange for a smaller settlement. In the case of Huron, private litigation against the firm was […]

  38. […] the biggest players in the financial crisis. When you watch the Andrew  Ross Sorkin HBO movie, Too Big To Fail, try to imagine current PwC Audit Practice Global Leader Tim Ryan standing behind AIG or current […]

  39. […] Adelson can’t be pushed around or pushed out with the backing of the federal government the way Hank Greenberg was cut off at the knees at AIG. […]

  40. […] taxpayers to save it.  And yet, PwC continues as AIG’s auditor since 1980, in spite of being in the middle of the dispute between AIG and Goldman Sachs, its other long-time client, and doing nothing for too long. PwC eventually sided with Goldman […]

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