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American Insurance Group, Inc. was founded in China in 1919 and has since grown

to be the largest insurance provider in the world, offering a variety of

different types of insurance policies. For the tax year ending December 31,

2005, the independent auditing firm PwC issued an adverse audit opinion.

Although the auditors concluded that the financial statements were presented

fairly, there were problems with the internal control over financial reporting.

The audit report stated that there was material weakness relating to �(1)

controls over certain balance sheet reconciliations, (2) controls over the

accounting for certain derivative transactions and (3) controls over income tax

accounting.�

For the first weakness, PwC found that reconciliations were not performed in a

timely manner and that reconciliation items were not resolved correctly and

could have affected receivables, recoverables, and intercompany accounts. The

result that multiple accounts were misstated under GAAP. Second, per GAAP, the

derivative transactions may not have been qualified for hedge accounting due to

a lack of appropriate controls such as evaluation and documentation. The result,

multiple balance sheet accounts were also misstated. Lastly, AIG had so much in

cash and assets that they did not know how to properly report it. The controls

were weak and there were errors in tax calculations and tax-related balances.

The tax accounts were misstated and therefore the retained earnings and income

was accounts were misstated.

This was an obvious indication that the company was in jeopardy and within two

years, the stock price would fall from over $2000 to just $9. The derivative

issue is what brought AIG to its knees during the housing market collapse,

because they were selling derivatives on derivatives, a risky gamble.

PwC was successful at identifying the internal control issues, as it is obvious

seeing the collapse which happened soon after. In other situations that did not

have the same outcome, it would be more difficult to determine whether or not

the auditor�s opinion was correct. However, in this scenario, there were major

control problems. AIG also admitted to finding accounting entries made by toplevel management that seemed to be linked to former members of management.

Financial statements had to be reinstated from the year 2000 to 2003.

Without internal controls, there will always be misstatements. For every

deficiency in an internal control allows for potential misstatements. AICPA says

that �effective controls reduce the risk of asset loss and help ensure that the

plan information is complete and accurate, financial statements are reliable,

and that the plan complies with laws and regulations.� I feel that the audit

opinion was correct due to evidence before and after the audit that controls

were not in place and the result was material misstatements.