AIG Discloses Financial-Reporting Control Deficiencies

American International Group Inc. said Monday that its internal control over financial reporting was ineffective as of Dec. 31, 2004. As a result the insurance company's independent auditor, PricewaterhouseCoopers LLP, will issue an adverse opinion with respect to AIG's internal control over financial reporting.

The company disclosed that an internal review uncovered control deficiencies, including the ability of some former members of senior management to circumvent internal controls, ineffective controls over accounting, and ineffective balance-sheet-reconciliation processes.

AIG will file its 2004 annual report no later than May 31. It also will restate financial statements for the years ended Dec. 31, 2003, 2002, 2001, and 2000, along with the quarters ended March 31, June 30, and Sept. 30, 2004, and 2003, and the quarter ended Dec. 31, 2003.

AIG said that shareholder equity as of Dec. 31, 2004, would be reduced by $2.7 billion as a result of accounting errors. About $1.2 billion of that is related to reinsurance--transactions in which an insurance company transfers risks to another insurance company. AIG says some of its reinsurance transactions didn't involve enough risk transfer to qualify as insurance transactions.

Under the Sarbanes-Oxley Act's section 404, companies are required to include with their annual reports an assessment by management of the effectiveness of internal controls over financial reporting, as well as an opinion by auditors on management's assessment.

AIG is the target of probes by the New York State Attorney General, the U.S. Department of Justice, and the New York State Insurance Department.