• A Prisoner’s Dilemma: AIG and Goldman Sachs Game Each Other And PwC

    By • Feb 18th, 2010 • Category: Latest, Pure Content, The Case Against The Auditors

    Jimmy Dell: I think you’ll find that if what you’ve done for them is as valuable as you say it is, if they are indebted to you morally but not legally, my experience is they will give you nothing, and they will begin to act cruelly toward you.
    Joe Ross: Why?
    Jimmy Dell: To suppress their guilt.

    The Spanish Prisoner, Written and Directed by David Mamet, 1997

    From Wikipedia:

    “The prisoner’s dilemma is a fundamental problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so….If we assume that each player cares only about minimizing his or her own time in jail, then the prisoner’s dilemma forms a non-zero-sum game in which two players may each cooperate with or defect from (betray) the other player. In this game, as in most game theory, the only concern of each individual player (prisoner) is maximizing his or her own payoff, without any concern for the other player’s payoff.”

    Gretchen Morgenson and Louise Story of the New York Times told us on February 6, 2010 that Goldman Sachs aggressively pushed AIG to the edge of liquidity by repeatedly demanding cash. A longstanding dispute over the value of securities that were covered by credit default insurance sold by AIG to Goldman Sachs had reached a crucial climax:

    “Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.

    A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

    A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

    After more than an hour of debate, the two sides on the call signed off with nothing settled…”

    Finally, on September 15, 2008, AIG cried uncle and capitulated, admitting they could not meet all collateral demands. The federal government bailed out AIG and taxpayer assistance to the company currently totals $180 billion. Some have already disputed several assertions in the Morgenson/Story piece on the basis, primarily, that Goldman Sachs was proved right in the end. Lucas van Praag, Goldman Sachs’ spokesperson, refuted most of it in a piece published in the Huffington Post.

    Morgenson/Story do a great job of documenting that the dispute between AIG and Goldman Sachs had been going on for a while. Their neato graphic says that AIG first sold Goldman Sachs insurance on the securities in 2003 and that Goldman Sachs first started asking for more collateral in July of 2007 to respond to what they saw as declines in the value of the underlying securities.

    I told you in my previous post that AIG had been struggling with issues over valuations for a while.

    “AIG Crisis One litigation [SDNY, Case No. 04cv8141] 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 at AIG 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…”

    When the Audit Committee of the Board of Directors of AIG met on January 15, 2008, about two weeks prior to the conference call the New York Times cites in the story above, minutes from the meeting say all the big names showed up:

    Present: Messrs. Michael H. Sutton, Chairman, George L. Miles, Jr., Morris W. Offit, Robert Willumstad, ex-oficio. Also present were Director Frank G.Zarb,a non-voting member of the Committee, Messrs. Tim Ryan, Dennis Nally, Henry Daubeney and Michael McColgan from PricewaterhouseCoopers LLP (‘PwC’), Mr. James Cole of Bryan Cave LLp, Mr. James Gamble of Simpson Thacher & Bartlett, LLP, President and Chief Executive Officer Martin J. Sullivan, Executive Vice President and Chief Financial Officer Steven J. Bensinger, Executive Vice President and General Counsel Anastasia D. Kelly, Senior Vice President and Comptroller David Herzog, Senior Vice President and Chief Risk Officer Robert E. Lewis, Senior Vice President and Director of lntemal Audit Michael E. Roemer, Senior Vice President Secretary and Deputy General Counsel Kathleen E. Shannon, Vice President-Corporate Governance Eric N. Litzky, Paulette Mullings-Bradnock of lnternal Audit, and, for portions of the meeting, Edward diPaolo, John French, Joseph Nocera and Alfred Panasci of lnternal Audit.

    For the benefit of those playing at home, the PwC attendees’ roles and responsibilities were/are:

    Based on my reading of the Audit Committee minutes, I believe that PwC was aware of weaknesses in internal controls over the AIGFP super senior credit default portfolio throughout 2007 and prior.  Why were they pussy footing around still on January 15, 2008 as to whether these control weaknesses were a significant deficiency (which would not have to have been disclosed) or a material weakness (which eventually was)? In fact, at this meeting, PwC was still more concerned about what it saw as an almost inevitable material weakness in controls over AIG’s financial close process instead. And for those of you who thought AIG’s only significant issue was with Goldman Sachs, I have to tell you, regrettably, this is not so.  AIG had a hornet’s nest of nagging issues that clearly required high level attention.

    Mr. Ryan commented that the significant deficiency in controls over the financial close process is the most significant deficiency and recapped that at the end of the second quarter there were concerns that without additional management procedures and a reduction in late adjustments and new errors, the financial close significant deficiency could rise to the level of material weakness. He indicated that the company had responded in the third quarter financial close and sustaining the fourth quarter close efforts will be important in the year end analysis.

    Mr. Bensinger then indicated that he, Mr. Sullivan and Messrs. Ryan and Nally had been meeting regularly to discuss the control matters and he had asked Mr. Ryan to update the Committee on those discussions. Mr. Ryan then provided the Committee with background on the issues, much of which had been discussed with the Committee in December and in follow-up sessions thereafter with Mr. Sutton. Mr. Ryan commented that following the third quarter close, the PwC team debriefed and assessed a number of issues that had occurred…

    PwC then goes on to second guess both the 2nd Q disclosures and 3rd Q 2007 disclosures as a result of the financial close control weaknesses and other major problems mentioned that had not been disclosed to Executive Management, according to PwC, until it was too late.

    “…the collateral issues could have been escalated to the AIG level earlier in the process.”

    And, in contrast to what the NYT article stated, AIG seems to have been trying to defend their position on valuations in all AIG business units with subprime exposures.  AIG hired KPMG and Deloitte to conduct an independent review of their Enterprise Risk Management and AIG operations with subprime exposure and to make recommendations on improving the risk function and on ways to obtain more information on pricing and valuation. But PwC would only respond that, “…further consideration of the super senior credit derivative valuation process is required.” I did not receive any response to my requests to KPMG and Deloitte spokespersons for information about this review and its results.
    By February 7th, the next Audit Committee meeting, PwC had come to the conclusion that a material weakness was going to be cited for the internal controls over the valuation process and not the weaknesses in the financial close process. Senior management was already preparing the ratings agencies, in particular, for a material weakness disclosure. There was grave concern that a ratings downgrade once this disclosure was made would cause additional, perhaps untenable, liquidity stress.

    “Mr. Sullivan asked Mr. Bensinger to update the Committee on the discussions with the ratings agencies in connection with AIG’s proposed filing of a Current Report on Form 8-K regarding AIG’s disclosures in connection with the valuation of the AIGFP super senior credit default swap portfolio and PwC’s views that there was a material weakness in financial control over the valuation process. Mr. Bensinger reported that he and Ms. Watson and Messrs. Dooley and Habayeb had telephone conferences with each of the ratings agencies… Standard & Poors in particular, having a good understanding of these credit markets, put the disclosure in proper perspective, with their head analyst indicating the belief that other companies would also have to deal with a material weaknesses.”

    However, I do not recall any other company, and certainly no other PwC client such as JP Morgan, Bank of America, or Goldman Sachs, admitting that their valuation process had been, and still was, weak.  Why did PwC decide to point the finger at AIG?  Neither AIG nor Goldman Sachs had been willing to defect or betray each other thus far, per the prisoner’s dilemma, even to save them both.  The dispute had been going on for more than a month, more than a quarter, more than a year.  It may have been excusable for PwC to allow a mismatch in valuation on the same assets in two of their clients for a month or a quarter due to timing differences in access to information.  But a serious, contentious mismatch for more than a year, through several 10Q’s, and now going on two 10K’s?

    So why the push now?

    What came next is telling:

    “Mr. Bensinger said that pricing inputs had been a spirited discussion topic, with PwC holding the view that AIGFP’s assessment does not include enough consideration of market participants’ views on pricing.”

    Market participants’ views on pricing = Goldman Sachs views, in my opinion.

    “Mr. Bensinger described the differences of opinion with Goldman Sachs on the pricing of the underlying collateral, noting Goldman’s acknowledged desire to obtain as much cash as possible from their collateral calls. He pointed out that Goldman was unwilling or unable to provide any sources of their determinations of market prices.”

    Mr. Bensinger made this statement in front of PwC  – Messrs. Daubeney, Robert Sullivan, the Global Banking and Capital Markets Leader and Bob Moritz, the US Assurance Leader and Managing Partner of the NY Metro Region and now US Chairman and Senior Partner.  Plus or minus Dennis Nally and the Goldman Sachs specific Global Relationship and Engagement partners, how much you want to bet these were some of the same guys sitting in on every Goldman Sachs Audit Committee meeting and hearing the other side of this “difference of opinion” during most of 2007 and all of 2008?

    In fact, PwC discouraged AIG from digging too deep into the pricing issue.  They wanted AIG to simply adopt the “market participants’ view”:

    “Mr. Bensinger emphasized that Management’s objective is to obtain the best estimate of valuation, not necessarily the highest estimate. Mr. Sullivan agreed, noting that AIG had been working diligently to find observability for the spread differential which everyone believes exists.  He added that extensive efforts, which he believed were appropriate to meet management’s fiduciary responsibility to shareholders, were not necessarily seen as a positive by PwC, but when it became clear that PwC did not consider the evidence AIG gathered to be adequate from a market observability standpoint, Management decided that the December 31 losses would not include an adjustment for the spread differential.”

    In fact, Andrew Ross Sorkin told us in his book, Too Big To Fail, Goldman Sachs was still not satisfied in June of 2008 that PwC was pushing AIG hard enough to consider “market participants’ views” on pricing on a timely or suffiicient basis so Goldman could “obtain as much cash as possible from their collateral calls”:

    …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.

    I still have not heard a specific explanation for how PwC could preside over a long running dispute between two of its most important global clients, a dispute that was material to at least one of them, obviously, that had the attention of its highest level partners, and not force a resolution based on consistent application of accounting standards sooner.

    I mean… We are talking about valuation of the same assets!

    I’ve been writing almost as long as I’ve been writing here that PwC should resign as AIG’s auditor.  Was it not enough that PwC had been sued by AIG shareholders more than once for its role in accounting errors and restatements?  Was it not enough that AIG never got corporate governance right and PwC let them get away with it forever?  Is it not enough that now PwC has its own partners testifying against their client on behalf of plaintiffs they settled with in order to extricate themselves from ongoing expensive litigation?

    Is it not enough that PwC was clearly torn between two clients (and maybe more who would have been impacted) who held enormous financial sway and lost its independence and objectivity? I think PwC finally succumbed to Goldman Sachs, selling out AIG while still tippy-toeing around the necessity to finally say which one was closest to complying with standards. Actually taking a consistent stand would potentially implicate other clients such as JP Morgan and Bank of America as well as Freddie Mac in a mark-to-model or rather “mark to make it happen” scandal?

    Will someone eventually come forward and tell us that Goldman Sachs sat PwC down in the summer of 2008 and told them, “Listen you dweebs, tell those AIG SOBs to cough up! You do whatever you have to do to make them fold! You hear me you milquetoast, muckety-muck, risk averse wienies?”

    And what of the possible collusion amongst the various parties to prop up market prices in the meantime by roundtripping some assets at month- and quarter-end in order to avoid writedowns as long as possible and, therefore, collect those hefty commissions and incentive bonuses?

    Stay tuned…

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    52 Responses »

    1. Francine,

      What an outstanding piece of journalism!!

      As I’ve said before (and will keep saying until things change or someone physically shuts me up), we will continue to have these issues and more holding the Big Four accountable for their own work (or lack thereof) until we stop having the auditors selected, managed and paid for by the companies they audit.

      Even the Public Company Accounting Oversight Board doesn’t stand a chance of reining them in until this fundamental flaw is changed. (See my blog post entitled, “Handcuffed without Consent,” to read how the Big Four continually tell the PCAOB to “pound sand.” Here’s the link. http://saramcintosh.wordpress.com/2010/02/03/handcuffed-without-consent/

      Thanks for nailing them on their obscene behavior yet again . . .

      Happy weekend,

      Sara McIntosh

    2. […] person not missing it is Francine McKenna. She really nailed PwC in her blog post today, entitled “A Prisoner’s  Dilemna-AIG and Goldman Sachs Game Each Other and PwC.” I’m still vibrating from my excitement after reading her fine piece of investigative work. […]

    3. I received this comment via email and have permission to reprint it here:

      Hi Francine,

      But there are added considerations between Goldman and AIG. Firstly, I’m not aware of any Prisoner’s Dilemma (PD) experiment where the government (read that bailout) can intervene in an unknown way, which is especially the case since the government has such a huge equity interest in AIG. The government has to decide how this particular contract will affect the entire future world of financial risk markets and regulation implications. How much more will the government bailout AIG?

      The real world PD game may be one of the government versus Goldman Sachs, which of course must make Goldman Sachs very nervous. Goldman would probably have gotten a better deal if this contract (actually contracts) was settled quickly and quietly while Paulson was still in command of the bailout. Paulson was not about to let his old bank fail or even hurt very badly.

      Secondly, there is an underlying assumption of rationality in PD games that is on shaky grounds in the real world. There’ve been extensions into the concept of “super rationality” — http://en.wikipedia.org/wiki/Prisoner%27s_delimma#Douglas_Hofstadter.27s_Superrationality

      Thirdly, the PD game assumes this decision is a one shot deal when in the case of Goldman and AIG there are long-term time implications. For example, how much will an AIG compromise decision impact its credit derivatives business in the future and the externalities on the impact on the credit derivatives markets of its customers and friends and future employee compensation.

      Lastly, there are the externalities of media reporting and reputations and pending regulations. We’re seeing an enormous example of how negative press about banker bonuses have had real-world impacts on such things as the greatly revised bonus levels in Goldman Sachs. This could be compounded in the press when credit derivative contracts are settled. At the moment voters in general are increasingly unhappy about being robbed by banksters.

      All I’m saying is that the real world is far too complex in most instances to fit neatly into the simplistic assumptions of any game theory application model, including all variations of PD games to date. This is more than a simple game of “chicken” because there are so many stakeholders now and in the future that are possibly impacted and will eventually squawk.

      And the PD game assumes a stationary (equilibrium) state that just does not fit the AIG versus Goldman Sachs dispute.

      The dynamic world generally is not a steady-state game that can be reduced to a set of equations that we can populate and solve. By populate I mean fill in all the missing variables and unspecified parameter values. This is why game theory is still largely confined to the ivory tower where very smart people mostly play in “Plato’s Caves” rather than real and constantly changing worlds —

      In any case, thank you for a great article.

      Robert E. (Bob) Jensen
      Trinity University Accounting Professor (Emeritus)

    4. […] the auditors (Francine McKenna) makes some speculations about the role that Goldman Sachs might have played in PwC issuing a material weakness opinion for […]

    5. […] say it’s outrageous to see ongoing material “disputes” regarding the fair value of complex derivatives between counterparties, especially if they are […]

    6. Francine:

      First, in the prisoner’s dilemna each suspect has a choice of admitting to the crime and fingering his accomplice in exchange for a reduced or remaining silent and hoping the other suspect does the same so both can go free. In the case of AIG and Goldman Sachs, no one was accused of doing anything wrong. There was a disputed amount due between the two parties. Anyone with a basic understanding of the prisoner’s dilemna and the AIG/Goldman Sachs dispute should see there is nothing in common between the two.

      The securities in the AIG/Goldman dispute were bonds. Neither AIG nor Goldman owned the bonds so it wasn’t necessary to actually value the bonds for financial reporting purposes. However, it is important to realize that something as simple as a bond can be valued in multiple ways.

      One way is to get a quoted price for the bond. For sake of discussion, let’s say that it is a 20 year 6% semi-annual coupon investment grade corporate bond rated BBB+ and the market will pay you 70 percent of face value or $700. That was fairly common in late 2008. (As an aside, I’ll bet you $50 you can’t calculate the yield on that bond using nothing more than a pencil, pad of paper a calculater of your choosing or excel. I make that offer to highlight the fact that you can write 2000 words on something as simple as a valuation but you can’t actually do an incredibly simple valuation. No reference materials. It’s a closed book test. If you understand anything about valuation a book would just be a waste of your time though.)

      The other option for valuing that same bond is that you can project the future cash flows of the bond and discount those cash flows back using an appropriate discount rate which might have been 7.5%. Using that method, the bond is worth $845 instead of $700.

      So what’s that bond worth?

      Remember that neither party had these bonds on their balance sheets so PwC didn’t audit either price. However, you won’t be surprised to learn that AIG said the bond was worth $845 and Goldman said it was worth $700.

      Now we arrive at the instrument that was valued and on the financials of AIG and Goldman and audited by PwC: the credit default swap. Was the credit default swap worth $155 ($1,000 minus $845) or was it worth $300 ($1,000 minus $300)? It was trading in the market at the time for an annual payment of $21 for 20 years. There are a number of valuation models that indicated the current value of swap was $75, $287, and $420. Wait, that is misleading. That’s just one model with three different sets of perfectly valid inputs.

      So I ask you, how much is that CDS worth?

      The answer is really simple so long as one condition exists. What condition is that? The year in which the value is calculated must be 2028. Only at that point can the value actually be known. In the meantime, all anyone can offer is the best estimate of the price based on a set of assumptions of what will happen in the future.

      AIG thought it knew how to value the CDS and had the best people in the world doing it. Guess what? They were wrong. That’s why they went out of business. Did AIG and Goldman disagree on the value? Well yes. That is why one thought it was a good idea to sell the instrument and the other thought it was a good idea to buy the instrument. If they both agreed on the value at the outset, it never would have been sold and there never would have been an argument.

      The argument between Goldman and AIG had nothing to do with what number to put on the balance sheet of either company and it didn’t involve PwC. The issue was Goldman using the least optimistic assumptions to demand more collateral from AIG while AIG used the most optimistic assumptions to avoid giving up any more collateral than it had to. Is this a surprise to you? Have you ever had a wreck? Did the estimate from the insurance company come in lower than the estimate from the body shop? I bet it did. Was that a PwC conspiracy also?

      Did Goldman or AIG yell at PwC about it? I’m sure they did and I’m sure PwC ignored them. Auditors get yelled at by clients all the time. That doesn’t mean auditors react to it and do what the client demands.

      I read your blog out of curiosity periodically and you sometimes have some good points. However, your blog clearly reveals one thing. You are bashing a profession that you aren’t even qualified to work in much less comment on publicly. The Big 4 are accounting firms with fairly insignificant side businesses in consulting. You worked in that side business. You had as much involvement in audits and fair value as the security guard at the front desk; you both worked in the same building as auditors.

      Like you I was a director at PwC. Unlike you I happen to be a CPA that actually had exposure to auditing and fair value issues (like thousands of others at PwC and the other Big 4). I also spent more than a decade there. If you think a couple of years as a director in consulting gave you an informed view of a profession you never worked in, you are out of your mind. Hopefully, most of your readers know that.

      I had very good times and very bad times at PwC — like many. I would never go back there for many reasons but I would never give up a day I spent there.

      It might help you get some perspective though if you take a step back and ask a question. Who does a better job of providing accurate information than CPA’s and the Big 4? Sure there are audit failures. However, without the Big 4 and CPA’s and CA’s performing audits where would our capital markets be? Sure it would be better from an independence standpoint if taxpayers or investors selected and paid the auditors. However, that would make auditors government employees and that model has far more flaws than public accounting firms. PwC has audit failures. Toyotas accelerate to 100 mph without warning. Military pilots bomb civilians. One space shuttle in 100 kills the crew on board. Doctors kill people for lack of handwashing. Investment banks make bad investments and go belly up. Kevin Costner made Waterworld.

      Mistakes happen and it is useful to have informed critics who can make public comments on those mistakes. Unfortunately, I don’t think you are able to do that.

      If you are so concerned that the world is full of bad auditors, let me make a suggestion. Go get a masters in accounting. Sign up for Becker and pass the CPA exam. Then go spend a couple of years working as an accountant so you can become a CPA. After you are a CPA, if you are lucky enough to work in a demanding environment like PwC surrounded by really smart people working on really screwed up clients where you can learn a lot you might be a reasonably competent auditor in five to seven years. More important you will have been exposed to people who are truly exceptional technically in their profession. You’ll also learn that it is an audit firm through and through and nobody gives a hoot about PwC Consulting.

      Of course you won’t do that. That’s unfortunate because if you did, your comments here would be far more insightful. Instead of a profession full of conspiracies you would see one full of complexities.

    7. @esa

      It’s clear you have a limited understanding of what was really going on in this situation or what was really at stake. The auditors had nothing to do with it? That’s just ridiculous. And I chose the Prisoner’s Dilemma to illustrate because, as market participants, AIG and GS had the chance to betray each other by going public with the conflict much earlier and exposing the otherwise hidden losses. But they didn’t. They continued to fight about it and PwC presided, perhaps hoping that the market would turn and there would be no need to do anything.

      Not only did I pass the CPA exam but I also worked in accounting for ten years in industry before ever joining KPMG consulting where I implemented automated accounting systems. But, no, I never worked on the audit side of a public accounting firm, thank God. And yes, I agree with you about PwC Consulting, for sure. That’s why I could not stay. And that’s why I have written about it so much.

      But you would have to be crazy that to think that I write any of these stories in a vacuum anymore, without plenty of expert technical resources to verify I have a plausible theory or explanation for a situation or, at least, an interesting one worth considering. If you read my latest story on Lehman, you’ll see even the PCAOB said that the audit firms had a repeated problem testing fair value of complex derivatives. There were so many instances of this problem in their inspections that it made it to their “top ten” list of issues auditors keep having, over and over again. The question in the AIG/GS case is whether there was a mismatch by design or default.

      The fact that you dismiss this discussion so readily, in totality, tells me that you are the one with your head in the sand, not me. I could tell you to go read some of the numerous books written about the crisis to learn more about the auditors’ role but, unfortunately, they do not mention the auditors much at all. I think the auditors play a critical role in the capital markets, or at least are supposed to. That’s why this is one of the few places you will see that role and how they do or don’t play it well discussed.

      Thanks for joining tin the discussion.

    8. Thanks for your response.

      So let me repeat my questions.

      What’s the yield on that bond? You only need to put 5 numbers into a financial calculator to find the answer. Surely that’s worth $50 to you.

      Is that bond I mentioned worth the quoted market price or the present value of the future cash flows? Come on this is easy stuff. Which is it?

      Let me ask a more pertinent question. Who had the value right? Was AIG right or Goldman Sachs? Surely if valuing the security is so easy and you have all that inside information and the benefit of 20/20 hindsight you should know what the real value was today.

      Finally, who does a better job of delivering accurate information to the public than CPA’s and the big 4?

    9. @esa

      This site is not intended to second guess technical questions. I avoid those and ask others to both advise me and support me when the questions are beyond my experience. My objective to to discuss PwC’s role as a firm, as an auditor, as professionals. I don’t think we know what the “right ” answer was in this case. I don’t think either of these clients was ever satisfied with the answer they got from their auditor or the rationale for why there was an ongoing significant discrepancy between the two that was allowed to be carried forward for so long.

      What should PwC have done in this situation to resolve it sooner, better, for the benefit of their clients, the shareholders of these two companies? That’s what I’m interested in and I have strong feelings about those issues because I worked in two of the big four for more than ten years, one of them as a Managing Director outside the US. At PwC I audited the firm itself. I saw how their processes for advising and consulting to audit engagements, insuring risk management and quality on engagements, monitoring compliance with laws and regulations and standards like independence worked from the inside out. Can you say the same? Are you sure the SEC, PCAOB, Department of Justice, Congressional Committees, state Attorneys General and plaintiff’s lawyers are not reading these posts and wondering why no one in the firms is asking these questions before it’s too late?

      I do not think the Big 4 are doing a good job of delivering accurate information to the public. Sophisticated investors have long gone beyond an audit report and the published financials and done their own due diligence. If you want a lesson in how financials can be scrutinized and second guessed beyond the too little to late approach of the audit profession, just look at some of the short sellers, like David Einhorn and his calls in Lehman,

    10. Francine:

      Thanks for your response.

      You said “I don’t think we know what the “right ” answer was in this case. I don’t think either of these clients was ever satisfied with the answer they got from their auditor or the rationale for why there was an ongoing significant discrepancy between the two that was allowed to be carried forward for so long.”

      We don’t know what the right answer is but PwC was wrong. How does that work exactly? If you don’t know what 2+2 equals can you render an opinion that when PwC was presented with that question they were wrong?

      Goldman had a very valid position to argue that the bonds were worth less than AIG claimed because the market price was less than what AIG said the value of the bonds was.

      AIG had a very valid position to argue that the bonds were worth more than Goldman claimed because the present value of the future cash flows was much
      greater than the market price of the bonds.

      Quoted market prices are preferable to cash flow models under GAAP but they aren’t mandated. If the FASB wanted to mandate the use of market prices, they could have required that and the problem would have been taken care of. The FASB didn’t do so because anyone who has ever dealt with these issues knows that valuation is anything but precise. An assets value is not a point. It’s an immense field of grey.

      The only person I have found who is wrong on this question is the person who claims there was one “right” answer that should have been mandated by the common auditor.

      There was no “right” answer and if there was, PwC had no authority to mandate it. It sounds like Goldman may have had better evidence to support their values at the time because they were relying on market values which is the preferable valuation input. However, AIG’s counterargument has proved true as well; the cash flows were worth more than the current market price and the market did bounce back to reflect the values AIG claimed in 2008 over the last year.

      Unfortunately for AIG the music stopped before they could be proven right. And fortunately for Goldman they were able to eliminate their counterparty risk by killing the counterparty at the most opportune moment. The party that was right was the party with the most capital. It’s a bit like a war. The country that is right is the country with the biggest military.

      When presented with a common fact pattern that illustrates the difficulties faced every day in valuing a financial instrument you respond “this site is not intended to second guess technical questions.” All this article did was second guess technical questions and the same can be said about a number of your other articles. Yet when pressed you won’t even hazard a guess on one incredibly simple question. Imagine answering that question on thousands of securities. That’s what an audit of a financial services company involves. Thousands of questions and not a “right answer” for a single one of them.

      You point out that David Einhorn was right on Lehman. Do you think he is right on 95+ percent of his trades? I seriously doubt it. If he gets 55% correct, he’s doing fabulous. Are the Big 4 right on 95+ percent of their audits? Absolutely.

      Short sellers play a valuable role in any market. In some cases they spot fraud the auditor overlooked and they are to be commended for doing so and putting their money on the line. However, they are not a more reliable source of information than CPA’s. To suggest that on average short-sellers communicate more valuable information about the market than audited financial statements is ridiculous. In fact, it is commonly known that short sellers gin up fraudulent information to take down the companies they are investing in. On average, short sellers are wrong nearly as often as they are right and they are frequently right because they publish lies. If you want to get your information there, knock yourself out.

      It is true that financial analysts take audited financials and do their own due diligence. They look for and spot things auditors miss as well. However, for all their efforts very few outperform the markets. Yes Andersen failed in the Enron audit. So did hundreds of investment managers that had their clients money in that stock.

      Am I sure “the SEC, PCAOB, Department of Justice, Congressional Committees, state Attorneys General and plaintiff’s lawyers are not reading these posts and wondering why no one in the firms is asking these questions before it’s too late?” You have a point there. The best way to monitor Big 4 auditing firms is to go straight to the horse’s mouth and how does one do that? Read the website of a disgruntled former employee that worked on internal consulting projects in the consulting arm of one of the firms. I’m sure they all have teams assigned to that beat around the clock. They are probably going to give up their subpoena power since they have you as a source now.

      You wrote that “At PwC I audited the firm itself. I saw how their processes for advising and consulting to audit engagements, insuring risk management and quality on engagements, monitoring compliance with laws and regulations and standards like independence worked from the inside out. Can you say the same?”

      So you were IFS? No comment though thoughts race through my brain. OK. Just one comment before my head explodes. Why do IFS employees always mislead people by claiming they were in consulting? You took that crap job in IFS. Just admit it. Sure its hard to admit the Firm will bill out a new college grad at $225 an hour but they won’t let an IFS person see a client. That’s unfair though. Maybe you were in consulting as you claim but they just wouldn’t deploy you so they put you on one of those make-believe internal projects.

      Your assignment was fascinating though. You should write about that. Even if it is not as interesting as all your conspiracy theories it would at least be factually accurate. I take that back. It would be really unprofessional to have a job that gave you insider knowledge of an organization’s internal processes and then set up a website to share that information with the world. You’ve obviously avoided that trap by writing about things about the firm you know nothing about. (On a side note, I hope you are enrolled in some writing classes because what I have seen here is pretty poor and this is the only way you are going to be able to make a living going forward. No accounting or consulting firm is ever going to get within 10 miles of hiring you.)

      Can I say the same about what I did at PwC? Certainly not. I wasted all my time learning and applying complex technical accounting rules while serving clients in distressed situations including more than my share of restatements, SEC investigations, litigation and fraud. When you think of me, you should imagine someone that has the knowledge you aspire to so you can write about it here.

      I have to ask though. I pissed a lot of people off in my time in the Big 4 but I never did anything so reprehensible that they suggested shunting me into IFS to do what you described. How does one get such a job? Did you back a minivan over a partner’s puppy? Was his eight year old daughter holding it at the time?

    11. @ESA
      I was not in IFS.

      You have no idea what goes on at the highest levels of PwC and the other firms. And you have no idea what the responsibilities of the auditors are. I’ve spelled it out clearly. Others that I respect agree. I am satisfied with that.


    12. @ ESA

      Did I miss something here? I can almost hear you grinding your axe in the background.

    13. Am I grinding an axe? This whole website is simply a forum for a single individual to grind an axe against some former employers.

      Like every PwC employee I was mistreated in some way shape or form. Was it really bad? I’m too close to judge but my therapist certainly thinks so. (To be fair and balanced I must add that quite a few people at PwC probably spent time on the couch describing the horrors of working with me as well.) I can say that what I went through was stranger than fiction. Either way I have as many reasons as anyone to hate the place and the Big 4 as anyone. However, the doors were only locked to keep people out. I was free to leave at anytime.

      Now if I had an axe to grind, I might create a website and try to make a career out of disparaging my former employer. Why would I do that you ask? Because that is what mature, successful people do. Just look at all the people who have taken that path to positions of influence and power. Look at all the good they are doing in the world. The answer is they are doing no good. It’s a road to nowhere.

      This entire website is one person grinding an axe and that’s fine. If Francine was commenting on the many deficiencies of Consulting and Internal Firm Projects, I wouldn’t take issue with what she says. If she was talking about consulting in Latin America, I would be very impressed with what she had to share. She knows that stuff.

      However, Francine and I are different. She feels comfortable discussing things she was exposed to tangentially and accusing licensed professionals of fraud, collusion and violations of their code of professional ethics without ever hearing their side of the story. She does this based on a belief that the books of one company must balance with the books of another company as though accounting is binary and devoid of judgement. She does this based on a belief that for every asset there is exactly one value and it is the job of an audit firm to go to all their clients and ensure that assets on the books of one client equal liabilities on the books of another client. I would agree with her 100% if the FASB wrote a rule that said that. That’s not what the rules say. Yet she is making accusations that warrant stripping someone of their professional license and their livelihood. For what? Failure to follow rules that don’t exist.

      I worked at PwC much longer than Francine. I’m a third generation CPA and fifth in my family. My relatives and I worked at five of the big eight. In short, we all got screwed. I worked on projects that included scads of professionals from consulting. However, I would never start a website that focuses on all the wrongs that exist in a practice group I never worked in.

      I would never start a website that discussed how incompetent management of a former employer was. Under the best of circumstances in any company the market is favorable, the company prospers, employees benefit and management somehow manages to avoid screwing up a good thing. The rest of the time, you would as soon kill your boss as look at him. That’s why they have to give you money to show up every day. Bosses suck. Are all bosses that way? No. Some bosses don’t have to meet high expectations. Those bosses can be relaxed and friendly and not transform themselves from the decent person we all are deep down into the monster that people become when they form a pack of money hungry wolf-like creatures. Is there a market for criticism of toxic work environments? Absolutely. That’s why we have Dilbert. However, you can’t effectively discuss a toxic work environment when it is obvious that the poison still courses through your veins. We all complain about current and former employers. Whether one does it on a website or at a Friday happy hour with co-workers its fine. However, let’s not confuse a Friday happy hour gripe session (which is what this website seems to be) with journalism.

      Some people congratulate Francine on her “great journalism”. And I suspect her motivation for this website is to move her career out of consulting and into journalism. That’s an admirable goal because critical journalism is very important. However, Francine is going about it the wrong way. First, she won’t go into the kitchen because it’s too hot and second she makes allegations and uses words she can’t justify. Permit me to compare this site to two other pieces of journalism to illustrate the point.

      Go read the Fortune article by Bethany Mclean that pulled one of the first strings that caused Enron to unravel. Bethany went into the kitchen despite the heat. She went and sat with Jeff Skilling for two or three hours and gave him every opportunity to rebut her assertions that there was no logical explanation for how Enron could produce such outlandish profits. She was around 28 at the time and I don’t want to demean her by saying this but she could best be described as a young lady who looks younger than she is. If I had to pick one word to describe what Jeff Skilling might have perceived her as on first meeting, I would say “cute”. (If you ever read this Ms. Mclean, I personally would have perceived you as “hot”.) She spent three hours telling the CEO of a Fortune 5 company “I don’t understand how your reported profits can possibly be correct.” He would explain it again and she could have taken the easy way out and said “Oh I get it” when she really didn’t and not write an article that drew a lot of heat aimed at her and her employer. She didn’t do that. She believed in her convictions and stood by her principles. When Skilling failed to convince her, he sent his CFO to try to convince her bosses. That woman amazes me for having the guts and ability to do what she did. But she developed the reputation and the sources and the backbone to go straight to the horse’s mouth and get the real story. Francince on the other hand recycles gossip which occasionally has an element of truth to it without ever naming a source. In

      Second, Mclean didn’t accuse Skilling of fraud, collusion, or ethics violations. She stuck to facts and cited sources and let the reader decide. There’s an article on Pro Publica about what happened in a New Orleans hospital after Hurricane Katrina. The undisputed fact in the article is this: Licensed doctors and nurses gave fatal doses of morophine to long-term care patients with a DNR even though a number of them would have lived otherwise. I don’t know what I would have done in that situation because there were many external factors to consider in a truly miserable circumstance. I might have given myself a lethal dose of morophine. The point though is that the journalists who wrote that article didn’t spew one-tenth the vitriol at those doctors and nurses that Francine spews here.

      There is management at a Big 4 firm and their are service providers. Francine is correct that I don’t know what goes on at the top of a Big 4 firm (though I’ve seen zero evidence that she does either and as one of thousands of PwC directors my experience was that directors at a Big 4 firm never go near anything that is important internally). However, I don’t care what goes on in the management of a firm. I am a professional practitioner of public accounting and auditing. I always have been and always will be. I have no desire to deal with firm management, systems implementations or internal consulting by a non-auditor to an auditing practice. Why? Because all those areas of expertise that Francine trots out to boost her credibility are just irrelevant background noise to a professional practitioner of public accounting. My focus is solely on getting the numbers in the financial statements correct. In my experience, my colleagues at PwC that were in client service roles had the same focus.

      Did an internal consultant like Francine see things in the audit process that were scary to her? Probably. Are Big 4 partners focused on maintaining compensation levels that no accountant should ever receive? Absolutely. Does the PCAOB always find something the Big 4 could do better in their annual inspections? Of course. Like auditors and movie critics, its their job to criticize. Do any of those facts come as a surprise to anyone? No.

      Is Francine’s treatment of the issues factual, reasonable, and professional? Everyone is entitled to their opinion. Mine is that she is not.

      So, do I have an axe to grind? Yes and it’s with someone who is grinding an axe she shouldn’t be grinding in the first place and doing a poor job of it in my estimation.

    14. @esa

      The primary difference between you and I, esa, is that for more than three years I have been willing to put my name on my writing and to give a voice to others to do the same. I’m willing to take the heat, the criticism, and to learn from others openly. You are not. I indulge you for now for the sake of the conversation. But I don’t have to and I’m being generous given your desire to continue to personally criticize me from an anonymous platform in order to avoid the actual arguments.

      My arguments, as much as I think you should be interested in listening to them, are not really directed at those who do their best to “get the numbers in the financial statements correct.” My arguments are directed at the leadership of the firms, the ones who actually run the businesses that employ practicioners like you, and those who are responsible for regulating them. The technicians, even most partners, are impotent to influence the business except by failing. They are there to simply follow standards and orders.

      I write about all the large firms, not just PwC. Unfortunately for the profession and for investors, all of them can at any point in time be criticized as heavily for their actions and lapses as I have criticized PwC recently in the AIG/Goldman Sachs case.


    15. @ ESA

      “However, I don’t care what goes on in the management of a firm. ”

      Exactly, that’s why you’re making me tired.

    16. esa – that’s far too many paragraphs of sneering to end up missing the purpose of the site, and the legitimate targets of FM’s criticism. As a mid-level D&T auditor, I understand the criticisms aren’t directed at me personally – heck, they’re not even directed at all people in leadership. (Just the inept ones, which are far too large a group).

      Man, you PWCers are sensitive…

    17. @Tony Rezko

      Methinks “esa” is part of the leadership thou mentions, thus his unwarranted beration at fm.

    18. Just for the record, I have some empathy for our friend esa. Esa doesn’t want to be a salesperson, focused on selling new work. Esa doesn’t want to worry about realization on the engagement, or utilization, or collecting cash from the client. All s/he wants to do is to be left alone to focus on the numbers, and to work with clients to get them right and proper.

      And I’m here to say there’s nothing wrong with that “old school” approach. I actually wish the firms would support people like esa, technicians who provide SME and professional standards guidance to the audit teams, and drive audit quality. Such people should be fostered and protected, because without them the firms are just salespeople with CPAs, or just a bunch of business managers looking to cut corners where they can in order to make a buck.

      But that’s not the reality. Like Santa Clause, such positions are mostly fantasy. (Warnnig: that was a spoiler for people who still beliieve in Santa….)

      But I have not come to praise esa, who clearly suffers from paralogia and poor rhetorical skills, making arguments filled with strawmen and red herrings.

      Esa it’s not too late to get a Liberal Arts degree to augment your CPA, my friend. You’d be surprised at what such a course of study can do for crticial thinking skills!

      — Tenacious T.

    19. TT:

      When pressed by clients and management, some professionals cave in. If you claim that is “reality” then you’ve gone to the dark side Luke. But what did you mean in that essay you wrote on leadership when you said “uphold standards”? Is upholding standards leadership or fantasy? If I’m living a fantasy, you must have abandoned your standards.

      As for the evil Big 4, in my experience the reason accounting standards are as high as they are is the Big 4. There is ample support in my experience for anyone looking to get the right answer in the Big 4. If you leave the Big 4 and go anywhere else, the knowledge and standards of the professionals you find declines noticeably.

      Is there pressure in a Big 4 job? Yes. But not so much that it will cause a principled professional to abandon his standards.

      As for your suggestion I get a Liberal Arts degree to enhance my rhetorical skills TT, I’ve read that post you submitted on leadership. Unless it was intended as a parody, I don’t really know how to respond. Dress like a leader? Stay fit? Get a haircut? Get your shirt pressed? Wear your clothes properly? It sounds like you’ve been watching too much Mad Men. Leaders today come in all shapes, sizes, haircuts and some are even rumpled.

      More seriously, I had three observations on that leadership article.

      First, your senior had to tell you to go get a copy of the accounting standards and read them? What skill is more basic in any job than getting a book and looking up the answer when faced with a question? Someone had to teach you that? Did your liberal arts education not teach you that books contain answers to questions? If not knowing that you need to look in an accounting book when working for an accounting firm isn’t gross incompetence what is? In case you are wondering, I carried a complete set of FASB’s, EITF’s and AICPA standards to the client on my first day of work (after finishing training). We were all given a set in 1989 and I bet you were also because I refuse to believe that a Big 4 office all shared a set of FASB’s maintained in the library. On that first day of work, when I was assigned the task of testing lease classifications and had questions, I picked up the book and found the answer. Was I proud of myself? Not until I heard from you that doing so wasn’t blatantly obvious to anyone who could fog a mirror.

      The additional things you said in that essay were “Do the right thing” and “Don’t worry if people like you”. I have observations on those recommendations as well.

      Can you find someone who isn’t trying to do the right thing? Everyone has every intent of doing the right thing. No one wakes up in the morning and says I’m going to go violate my professional standards today, or I’m going to go cause undeserving people a great deal of suffering, or I’m going to vote for legislation that will destroy the country. Leaders, losers, and killers all strive to do the right thing. Successful leaders are distinguished by their ability and dedication to discerning the right thing. Your essay overlooked that important principle but that is the crux of the issue when telling someone to do the right thing.

      On the topic of “don’t worry if people like you”, you ignore the fact that everyone is liked and disliked by someone, sometime. People who liked President Bush think badly of President Obama and vice versa. Groups of people right now rabidly love and hate Sarah Palin, Glenn Beck, Barak Obama, Benny Hinn, Vladamir Putin, Pat Robertson, Nicolas Sarkozy, child molesting Irish Catholic Priests, Pope Benedict XVI, Hugo Chavez, Kim Jung Il and I could go on. Each has at least hundreds of thousands of followers and even more detractors. If all those people have enormous groups of people who both love them and hate them, how is the reaction of followers and detractors of any use to a leader seeking to determine the right thing to do. The last partner I worked for in the Big 4 had many detractors as did the most principled partner I ever worked for. Both viewed their followers and detractors as a badge of honor yet only one was right. There is little if any correlation between doing the right or wrong thing and the reaction people have to it. Why one would pay attention to the reaction of others is beyond me. How good is a leader anyway if he is always looking backwards to find out who is and isn’t following him?

      So TT, I think I’ll keep the standards, education, and critical thinking skills I have, thank you. I may not be able to solve every problem I face, but I’ve solved all the problems I’ve been faced with so far. I may encounter a problem I can’t solve someday, but at least no one will have to tell me to go get a book and look up the answer.

      Thanks for responding.


    20. Whoa.

    21. esa,

      I’m told attention to detail is an important attribute of a professional accountant and auditor. With that in mind, I suggest you go back and read my guest post on leadership. If you look closely, you will see that I didn’t write it. What I did was translate from the milspeak in which the original article was written, and tried to make it relevant to the readers of this site.

      — Tenacious T.

    22. I tell you man, superlatives need to be awarded to certain folks on this blog. “The most thoughtful blogger” would be a start.

    23. I have read this discussion with interest. I am an FCA who worked for a big 8 firm and am now an Accounting Professor. I am skeptical of some of the pronouncements of the big 4, and I read this blog to find material to discuss in the classroom; I have found postings that are valuable and thought provoking. However, I am in general far more in agreement with the views expressed by esa on this particular topic. Unfortunately, the discussion in this thread seems to have descended to a level from which I hope it will soon recover. But I see the basic points raised by esa as valid: 1) the discussion, as outlined, between AIG and GS is not representative of the prisoners’ dilemma (e.g. as referenced in the Wikipediai entry). 2) the fact that AIG and GS could not agree on a single value of a financial instrument that should be included in their respective financial statements is not indicative of fraud, negligence etc by the auditors.

      As regards anonymity, I do not think it is unreasonable esa (and others) to remain anonymous, given the sensitive nature of some of the discussions.

      Thanks to all for your contributions.


    24. Wow, three cheers for Francine for publishing the esa comments. I think it is important to hear the other side, even when it is not entirely correct (or not at all correct, depending on where you sit). I think esa made some valid points initially (I agree with Stephen Brown’s comments above) , which were unfortunately diluted later by emotion and strayed a little too close to a personal attack for my taste. I do think you can legitimately criticize an idea or a profession when it is not your life’s work – you don’t have to eat a whole egg to know it’s bad. Sometimes you can smell it in the next room. So I reject criticism of Francine as somehow unqualified to comment on audit matters because she did not labour in audit for decades. Nor need you be a technical expert in every issue you wish to speak on – if this was so I would have been born mute. You neeed to approach difficult matters, even those you think you know well, with humility and seek out other informed opinions – which I think Francine does rather well. Do I agree with everything she says? Of course not, I’m a fat-ass partner with ample skin in the current game, that’s what makes reading her posts and the responses so entertaining, and yes, thought provoking. Please keep up the excellent work.

    25. esa, start a blog, that’s something I would read.

      So, is anyone going to refute his points about different techniques and points of view on valuation, that no auditor is going to attempt to balance transactions between two companies, etc?

    26. @Private Dancer

      esa missed the point about valuation in regards to the credit default swaps between AIG and Goldman Sachs, in this case having two different valuations for the same financial instruments mattered as they were counterparties to each other and the valuations of the credit default swaps directly impacted the amount of collateral needed to be transferred on the transaction. Per Goldman’s valuation AIG’s liability was greater on the Swaps then what AIG was reporting and as a result Goldman wanted additional collateral on the swap.

      The point Francine is making in her blog is that investors in AIG and other counterparties in AIG had a right to know of this valuation disagreement with Goldman Sachs as it involved the movement of billions of dollars of collateral which affected the liquidity of AIG (as we learn’t after AIG was taken over by the government, the collateral amounts in question were material as AIG was not able to continue as a going concern without government assistance). If PwC had disclosed the valuation disagreement publiclly there existed three possible outcomes:

      1) Investors/Counterparties agree that Goldman’s valuation is correct – the result being that AIG would have to increase its swaps liability, counterparties would require additional collateral to be put up by AIG, investors would have sold their shares, rating agencies and regulators would have required AIG to raise more capital.

      2) Investors/Counterparties agree that AIG’s valuation is correct – the result being that Goldman Sachs would have had to write down the gain on the CDS’s on their Financial Statements which could result in some investors selling their shares in Goldman.

      3) Both parties agree to settle on a valuation in the middle – which would result in a medium combination of (1) and (2).

      What Francine is arguing and I agree with is that the valuation risk associated with the swaps for AIG was of a material nature that any disagreement with a significant counterparty such as Goldman Sachs should have been disclosed to the public which did not happen in this case.

    27. @Tom Brown

      You have done my argument a great justice. I would only clarify one point.

      It is not PwC’s responsibility to disclose the disagreement but to force a resolution of the discrepancy according to GAAP or to make sure that the parties disclose their inability to resolve a material disagreement on a timely basis. Neither action occurred. If PwC was unable to evaluate the evidence to force this resolution or to force adequate disclosure of the conflict and there was a material scope limitation then they should have qualified or disclaimed an opinion on one or both sets of financial statements. If they were biased in the conflict and no longer independent, they should have declined to offer an opinion on either or both sets of financial statements. I have been saying for three years that PwC is already no longer independent with regard to AIG given the number of lawsuits and other investigations where PwC is also named as complicit in wrongdoing by their own client, AIG’s shareholders..

    28. So every material agreement made between two parties should be either balanced or noted in the K’s and Q’s of the difference? Got it. Let me know how that works out for you.

      Oh, and we’ll be waiting for you to tell us how EY should have went and determined that Lehman was moving liabilities to Repo to conceal liabilities.

    29. @Private Dancer

      On your first comment, I’m not going to keep trying to explain it to you. The points have been made and have been re-explained by others in more detail. If you still don’t get it, I can’t help you.

      With regard to EY and Lehman, I’m chomping at the bit to write about the bankruptcy examiner’s report. But I’ve already told you how Lehman did it. Three weeks ago. http://retheauditors.com/2010/02/22/its-mine-mine-all-mine-can-anyone-catch-lehman-stealing/

      And the bankruptcy examiner is now telling us exactly what EY did wrong. The plaintiff’s lawyers have EY on a silver platter now. Read the report. It’s available on the Jenner & Block law firm site. EY is schmucked.
      Jenner & Block site. http://bit.ly/dpEyxM

    30. Sarcasm falls flat against well-researched and articulated arguments. And now I have Tina Turner stuck in my head …

    31. Penny Dreadful – I agree. Kudo’s to Francine for posting anything I write.

      Private Dancer – I have a blog but it is boring technical accounting and auditing news that I rarely update. It’s not worth reading.

      Tony wrote – The point Francine is making in her blog is that investors in AIG and other counterparties in AIG had a right to know of this valuation disagreement with Goldman Sachs as it involved the movement of billions of dollars of collateral which affected the liquidity of AIG

      Would something like this have met with your approval?

      AIG exercises significant judgment in the valuation of its various credit default swap portfolios. AIG uses pricing models and other methodologies to value these portfolios that take into account, where applicable, and to the extent possible, third-party prices, pricing matrices, the movement of indices (such as the CDX and iTraxx), collateral calls and other observable market data. AIG believes that the assumptions and judgments it makes are reasonable and lead to an overall methodology that is reasonable, but other market participants may use other methodologies, including, among other things, models, indices and selection of third-party pricing sources, that are based upon different assumptions and judgments, and these methodologies may generate materially different values. (AIG Quarterly Report on Form 10-Q filed 8/6/2008)

      Does AIG’s valuation always agree with the valuation of the counterparties?

      Apparently not based on this paragraph from the same 10-Q:
      The valuation of the super senior credit derivatives continues to be challenging given the limitation on the availability of market observable information due to the lack of trading and price transparency in the structured finance market, particularly during and since the fourth quarter of 2007. These market conditions have increased the reliance on management estimates and judgments in arriving at an estimate of fair value for financial reporting purposes. Further, disparities in the valuation methodologies employed by market participants and the varying judgments reached by such participants when assessing volatile markets has increased the likelihood that the various parties to these instruments may arrive at significantly different estimates as to their fair values.

      What are these models they speak of? A brief description from the Form 10-Q filed on August 6, 2008, approximately 40 days before AIG collapsed is provided below. Read that description. If the same person ran that valuation model 100 times using the same data it would be virtually impossible for that person to arrive at the same answer twice. Were there disagreements with counter-parties? Of course. Counterparties disagree on everything because these are zero sum transactions and each side is motivated to fight for their side to maximize their return.

      Goldman wasn’t just squabbling over collateral though. Goldman was also willing to to buy AIG out of their positions, but at a low ball price. If the blue book on your car is $20,000 and I say “it’s only worth $15,000 but I’ll buy from you today for $16,000″ are you going to ignore blue book and accept that my price is more accurate? Why would AIG be expected to do so?

      AIGFP’s Super Senior Credit Default Swap Portfolio
      AIGFP values its credit default swaps written on the most senior risk layers (super senior) of designated pools of debt securities or loans using internal valuation models, third-party prices and market indices. The specific valuation methodologies vary based on the nature of the referenced obligations and availability of market prices. AIGFP uses a modified version of the Binomial Expansion Technique (BET) model to value its credit default swap portfolio written on super senior tranches of CDOs of asset-backed securities (ABS), including maturity-shortening puts that allow the holders of the securities issued by certain CDOs to treat the securities as short-term eligible 2a-7 investments under the Investment Company Act of 1940 (2a-7 Puts). The BET model uses default probabilities derived from credit spreads implied from market prices for the individual securities included in the underlying collateral pools securing the CDOs, as well as diversity scores, weighted average lives, recovery rates and discount rates. Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to the extent available. The CDO collateral managers obtain these prices from various sources, which include dealer quotations, third-party pricing services and in-house valuation models. To the extent there is a lag in the prices provided by the collateral managers, AIGFP rolls forward these prices to the end of the quarter using data provided by a third-party pricing service. Where a price for an individual security is not provided by the CDO collateral manager, AIGFP derives the price from a matrix that averages the prices of the various securities at the level of ABS category, vintage and the rating of the referenced security. The determination of some of these inputs requires the use of judgment and estimates, particularly in the absence of market observable data. AIGFP also employs a Monte Carlo simulation to assist in quantifying the effect on the valuation of the CDOs of the unique aspects of the CDOs’ structure such as triggers that divert cash flows to the most senior part of the capital structure. In the determination of fair value, AIGFP also considers collateral calls and the price estimates for the super senior CDO securities provided by third parties, including counterparties to these transactions. See Note 3 to Consolidated Financial Statements for additional information about fair value measurements.
      In the case of credit default swaps written on investment-grade corporate debt and CLOs, AIGFP estimates the value of its obligations by reference to the relevant market indices or third-party quotes on the underlying super senior tranches where available.
      In the case of credit default swaps written to facilitate regulatory capital relief for AIGFP’s European financial institution counterparties, AIGFP estimates the fair value of these derivatives by considering observable market transactions, including the early termination of these transactions by counterparties, and other market data, to the extent relevant.

      AIGFP employs a modified version of the BET model to value its credit default swap portfolio written on the super senior securities issued by CDOs, including the embedded 2a-7 Puts. The BET model uses default probabilities derived from credit spreads implied from market prices for the individual securities included in the underlying collateral pools securing the CDOs. AIGFP obtained prices on these securities primarily from the CDO collateral managers.

      The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates. The determination of some of these inputs requires the use of judgment and estimates, particularly in the absence of market observable data. AIGFP also employs a Monte Carlo simulation to assist in quantifying the effect on valuation of the CDO of the unique features of the CDOs’ structure such as triggers that divert cash flows to the most senior level of the capital structure.

      AIG’s implementation of the BET model uses a Monte Carlo simulation of the cash flows of each underlying CDO for various scenarios of defaults by the underlying collateral securities. The Monte Carlo simulation allows the model to take into account the cash flow waterfall and to capture the benefits due to cash flow diversion within each CDO.
      The BET model has certain limitations. A well known limitation of the BET model is that it can understate the expected losses for super senior tranches when default correlations are high. The model uses correlations implied from diversity scores which do not capture the tendency for correlations to increase as defaults increase. Recognizing this concern, AIG tested the sensitivity of the valuations to the diversity scores. The results of the testing demonstrated that the valuations are not very sensitive to the diversity scores because the expected losses generated from the prices of the collateral pool securities are currently high, breaching the attachment point in most transactions. Once the attachment point is breached by a sufficient amount, the diversity scores, and their implied correlations, are no longer a significant driver of the valuation of a super senior tranche.
      The credit default swaps written by AIGFP generally cover the failure of payment on the super senior CDO security, which in certain cases may also cover the acceleration of the super senior CDO security upon an event of default of the CDO. AIGFP does not own the securities in the CDO collateral pool. The credit spreads implied from the market prices of the securities in the CDO collateral pool incorporate the risk of default (credit risk), the market’s price for liquidity risk and in distressed markets, the risk aversion costs. Spreads on credit derivatives tend to be narrower than the credit spreads implied from the market prices of the securities in the CDO collateral pool because, unlike investing in a bond, there is no need to fund the position (except when an actual credit event occurs). In times of illiquidity, the difference between spreads on cash securities and derivative instruments (the negative basis) may be even wider for high quality assets. AIGFP was unable to reliably verify this negative basis with market observable inputs due to the accelerating severe dislocation, illiquidity and lack of trading in the ABS market during the fourth quarter of 2007 and the first six months of 2008. The valuations produced by the BET model therefore represent the valuations of the underlying super senior CDO cash securities based on AIG’s assumptions about those securities, albeit with no recognition of any potential effect of the basis differential on that valuation. AIGFP also considered the valuation of the super senior CDO securities provided by third parties, including counterparties to these transactions, and made adjustments as necessary.

    32. […] EY more than $160 million in audit and other fees.  Although this isn’t nearly as much as Goldman Sachs and AIG pay PwC – almost $230 million a year combined in 2008 – it was still a huge amount and […]

    33. Now we arrive at the instrument that was valued and on the financials of AIG and Goldman and audited by PwC: the credit default swap. Was the credit default swap worth $155 ($1,000 minus $845) or was it worth $300 ($1,000 minus $300)? It was trading in the market at the time for an annual payment of $21 for 20 years. There are a number of valuation models that indicated the current value of swap was $75, $287, and $420. Wait, that is misleading. That’s just one model with three different sets of perfectly valid inputs.

      A poster identified as “esa” gave this result of a question early on. This was having to do with pricing a “credit default swap” or CDS. The CDS was a pre-financial crisis invention where a buyer gets protection against the possibility that a bond issuer doesn’t pay back. The bond issue is(some company who borrowed money and gave over a promise to pay it back plus installment interest. This was historically evidenced by a fancy piece of paper giving all the details, but nowadays often by a recording in a ledger. “Book Entry Form”.

      The problem I have with the example is two-fold. First, I think what the poster was referring to is the actual payout in the event of a default of the bond (1000-845 = 155) or (1000-700 = 300) depending on what the bond is worth. But that is obviously not the value of the CDS, because it would have to be weighted by the PROBABILITY of default. Not simply if the bond is trading at a “discount” to issuing price.

      We are hung up on the idea these days that bond interest rates move up or down solely based on the likelihood that a bond issuer will run into trouble. Such is the stench of the financial crisis as it still hangs in the air. But practically, interest rates on traded bonds go up and down with the market price of borrowing. In the 1970’s, and even 1980’s, when unpredictable inflation rates played a much more significant role in bond pricing, even the best quality bond issuers could end up having bonds that traded at a discount. For the simple fact that when they issued the bond, the general interest rate in their group, say single A+ corporate, was 7%. And then general inflation pushed up traded A+ bonds to something like 8.5%. Consider 1978 as a year that might have happened.

      Well, the risk of default did not go up just because of general price inflation. In fact, default risk can obviously go DOWN in an inflation, because there is more money out there to earn and put into the company coffers.

      So it seems to me that, conservatively, CDS is something that can’t even be reasonably estimated. Even if a math Ph.D. ran a calculation, it would simply be a guess—a made up number. Even if modelling accompanied the guess, modelling is nothing new. Before computer power became so common, the models people valued things at ran in their brains. And when it was that kind of brain-modeling, things that could not be adequately valued were valued around ZERO, or equally, expensed (so zero value on the balance sheet). Otherwise, a lot of disclosure was given surrounding whatever price was attached.

      Isn’t it part of the general illness in the profession that many of us can play these games of shades of gray with a straight face? If you value the “esa bond” at a 9.34% return, because that’s what the fire sale environment of late 2008 (when hedgers were dumping their bond portfolios in the market for whatever they could get, to raise cash) OR 7.5%, because that’s what a reasonable discounted present value analysis of cash flow would yield, the fact is the actual product was a lottery ticket. The poster who gave the example entirely glossed over that. A CDS is bet that a company won’t pay its debt. If I bet on the Steelers for the 2011 Super Bowl, do I get to make a model and capitalize my “investment”? No. If I can, then am I allowed to short my Steelers “CVS” (collateralized victory in Super Bowl), and as a short, start talking down the Steelers’ chances of a victory after any Sunday loss, so I can make a profit on a the buy-back?

      I think when the history of accounting and “financial innovation” is written about these times, the flow of the discussion is going to reflect more this response and the original post then it will on those who offer the shut-up-and-accept it “realities” of trying to price things that are highly speculative and only contain vague guarantees of a payout.

    34. […] $160 million in audit and other fees since fiscal year 2001. Although this isn't nearly as much as Goldman Sachs and AIG pay PwC – almost $230 million a year combined in 2008 – it was still a huge amount and represented a […]

    35. […] $160 million in audit and other fees since fiscal year 2001. Although this isn't nearly as much as Goldman Sachs and AIG pay PwC – almost $230 million a year combined in 2008 – it was still a huge amount and represented a […]

    36. Hoofin:

      You and I are in complete agreement. There are an infinite number of ways to value what you refer to as the ESA bond and the related credit swap. During 2008 and most of 2009, the range of possible values was all over the place because the market and the valuation inputs where a bit like the instruments on an aircraft in a 1960’s movie about the Bermuda Triangle; a fog enveloped the plane and every needle on every guage just started spinning. My example was intended to illustrate that the issue is not cut and dry. There were many answers to the question of “How much is the CDS worth?”It wasn’t something that PwC could have been expected to resolve. Furthermore, the code of professional conduct forbids them from violating client confidentiality and sharing such sensitive information between clients so they weren’t in a position to force a resolution as Francine suggests.

      What was their obligation? To audit the estimate that AIG recorded as a liability in accordance with the professional standards. Do those standards require them to get the counterparties sign-off on the estimate? No. Is the auditor culpable if estimate is wrong? No. Do auditing standards and accounting standards require that the two audit clients record the same amount? No. Do auditing standards indicate that if such an unresolved matter exists between two companies, the auditor has a scope limitation? No.

      These situations exist on many audits and Francine’s expectation for how this one and all the others should be resolved is just that: her expectation. It has no basis in GAAP and no basis in GAAS. I know she disagrees but her view simply isn’t reality. A matter such as this can’t be resolved with a few phone calls between an auditor and his clients during the 45 day period public companies have to issue financial statements. It would take a judge, jury and lawyers several years to resolve this dispute. Why she thinks auditors can do it in the span of six weeks is beyond my understanding.

      Let’s not forget that AIG Financial Products stopped entering new trades 18 months ago and they are still employing hundreds of traders just to unwind those trades. They will continue doing that for a couple of years. Francine thinks those matters should have all been settled by the auditor and that traders aren’t necessary. That’s a bit like saying that while the trial was going on Atticus Finch should have also integrated the schools. Or maybe Lindbergh shouldn’t have landed in France but should have instead crossed the Atlantic and then flown straight to the moon. Those are all great suggestions but for the fact that they are (a) impossible and (b) not their job.

    37. esa, I disagree that Francine is suggesting that PwC could have resolved the matter. Here is a quote from the post:

      Is it not enough that PwC was clearly torn between two clients (and maybe more who would have been impacted) who held enormous financial sway and lost its independence and objectivity? I think PwC finally succumbed to Goldman Sachs, selling out AIG while still tippy-toeing around the necessity to finally say which one was closest to complying with standards. Actually taking a consistent stand would potentially implicate other clients such as JP Morgan and Bank of America as well as Freddie Mac in a mark-to-model or rather “mark to make it happen” scandal?

      Her view is that PwC inevitably sided with the analytics as run by Goldman Sachs, which would have given the higher annual yield and the lower bond price — 9.34% in my example.

      I think it’s very interesting that PwC was in a situation where they would have to attest to a yield-to-maturity valuation in one circumstance, and a mark-to-market valuation in another. You are correct that both of these could be acceptable GAAP. But I wonder what would be missing from the one or the other in the “VEPCO” framework:

      Presentation (and disclosure)
      Obligations and rights

      The point is that PwC would have to attest to management’s assertions for VEPCO of the one client, and then go to the counterparty, and attest the same. But they can’t disclosure that either counterparty values the same security differently, or that the one counterparty has a claim for more collateral from the first, and that the first has a potential liability to the second.

      If PwC’s auditing puts one of the two in shaky circumstances PwC loses the business.

      So probably PwC was not independent at some point, as to their relationship with GS and AIG. They need not have brought the parties together to ascertain an acceptable price. Only that their sign-off on financials could have been influenced by the consideration that they would lose a multi-million dollar revenue stream if they raised doubts about one or the other’s valuation of the controversial CDS asset.

      This is why I say the Big Four are a cartel. It is harder to be independent–or objective—when your client base contains so many interlocking financial companies. The collapse of one could affect the financial health of others of your clients.

      I disagree with the post on the notion that mark-to-model is inappropriate, if the model is a discounted cash flow of expected revenue streams. One of the tragedies of the financial crisis was this whole veneration of “mark-to-market” as some kind of earthly deity. In a market panic (mass selling of securities), the market is not rationally or objectively pricing the paper that is trading. They are simply looking for a price to dump it. So these prices are hardly “objective” and the discount rates are hardly credible. I am very much in favor of a mark-to-model if the model is credible. Hold-to-maturity transactions would fit that model.

      Francine McKenna is bringing up very important concerns that few people seem to be thinking about. Would we be better off in a Big Twelve auditing environment, instead of Big Four? If there were multiple auditing firms–or a rotation—it’s less likely that one auditing firm would be auditing two companies with the same, material, transactions between them. That should be an audit concern.

      Breaking up the Big Four into threes, for example, would hurt no one except for those at the very tip-top of the corporate pyramids in each. These people have already abdicated their responsibility to the general public in exchange for partnership multi-millions, and so no one should cry a tear for them.

    38. Hoofin:

      Permit me to illustrate my perception of what happened between GS and AIG. At the end of my analysis, you can either tell me which facts I have wrong or tell me how this matter was supposed to be resolved in the summer of 2008.

      Imagine for a moment that AIG sold GS a CDS on a $50 million face value pool of mortgage backed securities in June, 2007. The MBS has 30 years to maturity remaining, yield 5.5% and produce monthly payments of $283,900.

      AIG sold the CDS for 50 basis points a year. In other words, GS will pay AIG $250,000 a year. The PV of the CDS premium payments that GS must pay AIG is $3,633,000.

      In June 2008, several things happen. First it becomes apparent that the default rate will on the MBS pool be an unprecedented 8%. Due to the higher default rate, the projected monthly payments are expected to be $261,188 instead of $283,900. Second, the higher default rate has impacted the risk adjusted discount rate which is now 6.5%. If you recalculate the PV of the cash flows on the MBS you see that it has declined substantially from $50 million to $40,860,892. Of that amount $674,000 is due to the fact that Goldman collected 12 months of payments. The remaining decline in the present value of the future cash flows of the MBS of $8,466,518 is due to the higher default rate and the higher risk adjusted rate of return.

      At this point, the MBS has suffered a 17% loss and the CDS has suffered a 233% loss. AIG’s projected payments on the CDS is $8,466,518.

      So Goldman calls AIG in August and to ask them to post collateral on the CDS. GS wants AIG to post $14.8 million of collateral. Here’s GS’s argument. Mortgage backed securities are trading (when they trade) for 60% of face. At 60% of face, GS calculates that AIG’s liability on the CDS is currently $19,730,000 and 75% of that amount is $14.8 million.

      AIG laughs at them. The 8% default rate hasn’t even happened yet. It’s just projected defaults. Plus, a big portion of the loss of $8,466,518 AIG calculated is due to interest rate changes. AIG isn’t insuring GS for interest rate changes. AIG is just insuring against defaults. The biggest part of what GS wants to be paid for though is the decline in the moribound MBS market. Again, AIG never agreed to insure GS for that.

      So if you are AIG, what do you pay out? As little as possible of course because this is a once in a lifetime market and it will turn around in 2009. If fact that is true. 2009 was an incredible year for MBS and bonds because they were trading at ridiculously low prices in 2008. No matter how you calculate the value, AIG would have had an enormous gain in 2009 so they were right to hold out and stick with their values.

      If you are GS, what do you hold out for? Keep in mind this is a 30 year contract with 29 years left on it. Like AIG you know that MBS aren’t going to trade at 60% of face value for long. This market will never come along again so you have to get out of this trade as soon as possible while it is worth the maximum amount. So you demand that $15 million of collateral to soften AIG up. Then you make the pitch. Forget the $15 million of collateral. If AIG will just pay Goldman $12 million right now, Goldman will cancel the entire contract. Not only that, but if AIG will pay a similar amount, GS will take any other CDS that AIG wants to get out of. Everyone knows the CDS are choking AIG and there are no buyers. So if AIG will just pony up enough money, GS will take away all their misery and their credit default swaps.

      Goldman wasn’t really interested in collateral because while they may hold collateral, they don’t own it. They may have to give it back when the market inevitably turns. Goldman made money buying CDS from AIG as long as they could. When the credit markets completely collapsed Goldman knew that there was no more money to be made as a holder of a CDS. The company that was positioned to make money starting in the fall of 2008 was AIG. The only problem was that AIG didn’t have enough capital to stay in the game. Goldman had plenty of capital so if they could get AIG to pay them to take the CDS’s off their hands when the derivative liability was the greatest, GS could make a killing when the market bounced back.

      So help me out. It appears to me that AIG was using cash flow models because it knew that long-term the market would snap back to what the models were telling them. It also appears to me that GS was using the market prices for bonds and CDS because it was the strongest negotiating tool at its disposal. Both parties were driven by greed and survival to manage the settlement of a contract in an illiquid market and either maximize their return or minimize the damage they suffered.

      Obviously, I’m misunderstanding something. Was there a liquid market for MBS and CDS in the summer of 2008? Were MBS and CDS trading at amounts that were in line with the underlying cash flows? My understanding is that the answer to both questions is no and both AIG and GS took the position that suited them on a derivative that had decades left to run.

      As for how the auditors were supposed to resolve that issue, I see no possible explanation for that expectation.

    39. So help me out. It appears to me that AIG was using cash flow models because it knew that long-term the market would snap back to what the models were telling them. It also appears to me that GS was using the market prices for bonds and CDS because it was the strongest negotiating tool at its disposal. Both parties were driven by greed and survival to manage the settlement of a contract in an illiquid market and either maximize their return or minimize the damage they suffered.

      This is where the problem would be: Both companies are using the same auditor. And the auditor needs to be objective and independent.

      You are saying that because the market was failing to “determine a price”, PwC should attest to both AIG’s model and to GS’s without any additional commentary.

      So management’s assertion about valuation is one thing that would be producing wildly different answers (VEPCO). I think that problem also, indirectly,affects presentation, completeness and rights & obligations. PwC would at least have to make clear to AIG financials users that there is a dispute with GS about valuation, and to GS financials users that their pricing of the CDS is based on a specific assumptions about the contract with AIG.

      Francine is saying there is a potential conflict of interest if PwC remains auditor of both. I don’t think it has anything to do with the amount of time allotted for an audit—because otherwise an auditor could always use time constraints as a defense to a bad audit. If PwC couldn’t understand the math, again, that’s not an excuse. They shouldn’t have taken the assignment.

      esa, you’re right that there was no easy resolution of price for that financial “product” slash bet. But how does that absolve PwC? They are supposed to take management’s assertion about valuation and test it. If it is based on assumptions, presumably you have to disclose these assumptions for the users of the financials.

      It’s very clear that AIG was not disclosing the downside to the agreements it was making about CDSs. They didn’t disclose—even experts in the regulatory community were surprised about some of the deals AIG entered into. PwC had a hand in that, because they gave over an auditing opinion without requiring much in the way of disclosure about the more exotic products.

      I agree with you that in a fire-sale environment, it is hard to find an objective price—one that adequately values future expected cash flows by some reasonable standard. Everyone wants to hold cash and will make great sacrifices on price just to have cash in their hands. Or they are (more likely) subject to margin calls from their lenders. Or they are (similarly) forced to unwind their hedge funds because of redemptions.
      The only price available is the one the last panicked seller cashed in for. And with financial products, these prices are both highly unreliable and destabilizing. As we saw in late 2008. And October 19, 1987 for that matter, when the stock exchanges stopped quoting trading prices because there was no “bid”

      What I don’t see is how PwC gets to say, “well since the price can really be any number in this environment, we’ll just accept management’s number without comment.” Especially when it is auditing both sides of a transaction.

      Are you comfortable with that? Does PwC really feel “objective” with that stance? Would you want to rely on financials made up of assertions like that, without at least footnoted disclosure?

    40. Hey all,

      I work in the industry and think it’s important to note that the auditors operated under existing rules and GAAP – Generally Accepted Accounting Principles.

      And according to Compliance Week, “companies were still following Financial Accounting Standard No. 140, Accounting for Transfers and Servicing of Financial Assets, to decide when an asset transfer qualified as a sale (that could be kept off the balance sheet) or when it had to be treated as a financing (that remained on)….That rule has since been codified into the Accounting Standards Codification under ASC 860-10.”

      In short, they were acting on the laws and practices that were in place at the time.

    41. I am not a CPA nor do I work for a public accounting firm. Nevertheless I am an accountant and have more than a passing interest in the accounting profession. It seems to me that you are all losing sight of a very important fact in your back and forth: There are real people with real money behind the transactions and “valuations” that the big accounting firms are supposed to be attesting to. And when the accounting profession does not do their jos well, real people suffer.

      The comment by Jay Ryan is especially indicitive of the point I want to make. There is a big difference between doing what is legal and doing what is right. Just because a course of action (or inaction) is legal does not necissarilt make it right. Since when has the accounting profession had the luxury of hiding behind simply doing what is legally expected of them? There are moral choices to be made in every undertaking and it is (or so I have been led to believe) that it is the auditors’ role to expose the “less-than-moral” actions of corporate chieftans. If the accountants won’t or can’t do that, who will?

    42. […] carry the opposite side of the same transactions at a different valuation, (read post entitled, “A Prisoner’s Dilemna: AIG and Goldman Sachs Game Each Other and PwC” by Francine McKenna for the unbelievable […]

    43. […] some cases the auditors even allow the same assets to be valued differently at two of their clients. (Is there more of that going on?  Hey SEC, inquiring minds want to […]

    44. […] with regulators, spent almost two decades as an auditor at Coopers before joining AIG in 1984. Steven Bensinger, AIG’s new chief financial officer, also started his career at Coopers & […]

    45. […] (who they also own) to squeeze their workers on their premises.  And then there’s the strange saga of their dispute with AIG over CDS insurance while PwC stood by, thumbs in […]

    46. […] and collecting payola while banks are doing as they wish. In some cases the auditors even allow the same assets to be valued differently at two of their clients. The data proves it. See “Accounting for Banks’ Value Gaps,” Michael Rapoport, The Wall […]

    47. […] by the same auditor.  I’ve written about that issue with regard to PwC presiding over the long running dispute between their two clients, AIG and Goldman Sachs, over the valuation of credit default swaps.  I wrote about it again last week in reference to two […]

    48. […] Andrew Ross Sorkin have any notes about this that didn’t make it to his […]

    49. […] “Goldman Denies Killing Funds; Investment Bank Says Its Actions Didn’t Push Bear Stearns Vehicles Over Brink,”declared the title of a 12/14/10 Wall Street Journal article by Liz Rappaport.  Goldman’s defense on this one is quite ingenious: They didn’t mark down the valuation of the mortgage securities they had issued, even though the market was tanking and other issuers were writing down the values of similar securities they’d issued.  (Obviously Goldman is much better at controlling their auditors than most—just ask AIG, or read Francine McKenna’s post about prisoner’s dilemnas.) […]

    50. […] should finally turn their attention towards the audit firm.  Maybe they can take a look at how they played their two clients, AIG and Goldman Sachs, against each other regarding the valuation of the same set of […]

    51. […] is included in the discussions of AIG’s problems and the AIG and Goldman Sachs collateral dispute but these stories have already appeared in detail elsewhere. The report describes PwC’s final […]

    52. […] consistent with what I read in AIG Audit Committee Meeting minutes from January 15th, 2008. Attending the meeting from […]