AIG 2005 Annual Report Download - page 192

December 31, 2005 based on the criteria established in Internal Management’s assessment of the effectiveness of AIG’s
Control — Integrated Framework issued by the Committee of internal control over financial reporting as of December 31,
Sponsoring Organizations of the Treadway Commission 2005 has been audited by PricewaterhouseCoopers LLP, an
(COSO). independent registered public accounting firm, as stated in
A material weakness is a control deficiency, or a combina- their report, which is included in this Annual Report on
tion of control deficiencies, that results in more than a remote Form 10-K.
likelihood that a material misstatement of AIG’s annual or
interim financial statements will not be prevented or detected. Remediation of Material Weaknesses in Internal Control
AIG management has concluded that, as of December 31, Over Financial Reporting
2005, the following material weaknesses in internal control Throughout 2005 and continuing in 2006, AIG has been
over financial reporting remained: actively engaged in the implementation of remediation efforts
Controls over certain balance sheet reconciliations: AIG did to address the five material weaknesses in existence at
not maintain effective controls to ensure the accuracy of December 31, 2004 and disclosed in its 2004 Form 10-K.
certain balance sheet accounts in certain key segments of These remediation efforts, outlined below, are specifically
AIG’s operations, principally in the Domestic Brokerage designed to address the material weaknesses identified by AIG
Group. Specifically, accounting personnel did not perform management. As a result of its assessment of the effectiveness
timely reconciliations and did not properly resolve reconciling of internal control over financial reporting, AIG management
items for premium receivables, reinsurance recoverables and determined that as of December 31, 2005, two material
intercompany accounts. As a result, premiums and other weaknesses, relating to the control environment and controls
considerations, incurred policy losses and benefits, insurance over the evaluation of risk transfer, had been remediated, and
acquisition and other operating expenses, premiums and three material weaknesses, relating to the controls over certain
insurance balances receivable, reinsurance assets, reserves for balance sheet reconciliations, controls over the accounting for
losses and loss expenses, reserve for unearned premiums, other certain derivative transactions and controls over income tax
assets and retained earnings were misstated under GAAP. accounting, had not been remediated.
Controls over the accounting for certain derivative transactions:
AIG did not maintain effective controls over the evaluation Completed Remediation
and documentation of whether certain derivative transactions
qualified under GAAP for hedge accounting. As a result, net Control environment: As of December 31, 2004, certain of
investment income, realized capital gains (losses), other reve- AIG’s controls within its control environment were not
nues, accumulated other comprehensive income (loss) and effective to prevent certain members of senior management,
related balance sheet accounts were misstated under GAAP. including the former Chief Executive Officer and former Chief
Controls over income tax accounting: AIG did not maintain Financial Officer, from having the ability, which in certain
effective controls over the determination and reporting of instances was utilized, to override certain controls and effect
certain components of the provision for income taxes and certain transactions and accounting entries.
related income tax balances. Specifically, AIG did not main- AIG has taken several significant actions to improve its
tain effective controls to review and monitor the accuracy of control environment, starting with the appointment of new
the components of the income tax provision calculations and senior management with a new tone and philosophy. AIG’s
related income tax balances and to monitor the differences Chief Executive Officer and Chief Financial Officer, together
between the income tax basis and the financial reporting basis with other senior executives, are committed to achieving
of assets and liabilities to effectively reconcile the differences transparency and clear communication with all stakeholders
to the deferred income tax balances. As a result, income tax through effective corporate governance, a strong control
expense, income taxes payable, deferred income tax assets and environment, high ethical standards and financial reporting
liabilities, retained earnings and accumulated other comprehen- integrity. To strengthen and enhance its overall financial
sive income were misstated under GAAP. reporting and internal control environment, AIG has increased
The control deficiencies described above resulted in the resources for technical accounting, internal audit, enterprise
Second Restatement. In addition, these control deficiencies risk management and compliance functions, hired additional
could result in other misstatements to the aforementioned staff with specialized financial and accounting expertise, and
financial statement accounts and disclosures that would result established stronger reporting lines within the financial report-
in a material misstatement to the annual or interim AIG ing function.
consolidated financial statements that would not be prevented Among the specific actions taken by AIG to remediate this
or detected. Accordingly, AIG management has concluded that material weakness and to further strengthen overall controls
these control deficiencies constitute material weaknesses. over financial reporting were the following:
As a result of the material weaknesses in internal control AIG has established a Financial Disclosure Committee to
over financial reporting described above, AIG management has assist the Chief Executive Officer and the Chief Financial
concluded that, as of December 31, 2005, AIG’s internal Officer in fulfilling their responsibilities for oversight of the
control over financial reporting was not effective based on the accuracy and timeliness of the disclosures made by AIG.
criteria in Internal Control — Integrated Framework issued by the
COSO.
140 AIG m Form 10-K