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Tuesday, March 08, 2005

"Assisted Accounting Manipulation" and the AIG Probe

This from the Wall Street Journal on the ongoing investigation of AIG's accounting of a transaction with General Reinsurance:

Federal and state investigators are looking at whether a transaction between Berkshire Hathaway's General Reinsurance Corp. and American International Group Inc. four years ago transferred sufficient risk to AIG to allow the company to account for it as an insurance policy, people familiar with the matter said.

New York-based AIG booked the transaction at issue as insurance, the people said, a move that boosted its premium revenue by $500 million while also adding $500 million to its property-casualty claims reserves. Generally accepted accounting principles require insurance and reinsurance transactions to transfer "significant" risk from one party to another if either intends to account for the transaction as insurance; without significant risk transfer, such transactions must be accounted for as financing, under rules that are often less favorable.
Click here for the whole article.

I'm reminded of how much accounting chicanery requires the assistance of another party (in this case, General Re). Another example of "assisted maniputlation" ( requiring the assistance of a third party) is "channel stuffing", where a customer agrees to a sale far in advance of the normal period when it would take place, with delivery at a much later time. This allows the vendor to book the revenue in an earlier period. A classic example of channel stuffing would be the booking of sales of barbecue grills to stores in December, rather than in the spring when they normally would be sold.


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