AIG 2005 Annual Report Download - page 193

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
AIG has implemented new controls, including specific Controls over the evaluation of risk transfer: As of Decem-
procedures with respect to post-closing adjustments and consol- ber 31, 2004, AIG did not maintain effective controls over the
idating entries. proper evaluation, documentation and disclosure of whether
AIG has taken remedial actions with respect to certain certain insurance and reinsurance transactions in the General
employees in management and in the underwriting, account- Insurance segment involved sufficient risk transfer to qualify for
ing, auditing, actuarial and financial reporting functions. Such insurance and reinsurance accounting.
remedial actions included further training and supervision, To remediate this material weakness, AIG has developed a
reassignment outside areas of involvement with financial formal risk transfer policy for direct insurance, assumed
reporting, or termination. Employees identified as needing reinsurance and ceded reinsurance in the General Insurance
further training and supervision underwent formal ethics segment. This policy establishes guidelines for the assessment
training and recertified their compliance with AIG’s Code of by the underwriting, and if appropriate, actuarial functions, of
Conduct. the adequacy of risk transfer to support insurance accounting,
AIG now requires that all employees complete formal ethics and requires that appropriate documentation of the assessment
training developed and monitored by AIG Corporate Compli- be provided to the accounting function to allow proper
ance. AIG has implemented a Director, Executive Officer and accounting for the transaction.
Senior Financial Officer Code of Business Conduct and Ethics, and AIG has also established procedures to incorporate risk
requires all members of the Board of Directors, executive transfer assessments into its underwriting and financial audit
officers and senior financial officers to confirm that they adhere processes. Although AIG continues to refine and enhance its
to the stated principles and procedures set forth in that Code. controls over the evaluation of risk transfer, including develop-
AIG has strengthened the position of Chief Risk Officer, ing a process for updating the risk transfer policy to reflect
responsible for enterprise-wide credit, market, and operational changes in accounting pronouncements, based upon the
risk management and oversight of the corresponding functions significant actions taken, as listed above, and the testing and
at the business unit level and has empowered the Chief Risk evaluation of the effectiveness of the controls, AIG manage-
Officer to work more closely with top executives at the ment has concluded that remediation of this material weakness
corporate and major business unit levels to identify, assess, has been achieved as of December 31, 2005.
quantify, manage and mitigate risks to AIG. Continuing Remediation
AIG has established an Operational Risk Management
department, reporting to the Chief Risk Officer, to engage in AIG has devoted significant efforts towards remediation of
expanded risk self-assessment processes for more effective its three remaining material weaknesses, and remediation of
identification and management of operational and reputational AIG’s control environment has aided in these efforts. None-
risks. theless, these material weaknesses are not yet fully remediated
The AIG Board of Directors has established the Regulatory, as of December 31, 2005. AIG management continues to
Compliance and Legal Committee to provide oversight of assign the highest priority to AIG’s remediation efforts in these
AIG’s compliance with applicable laws and regulations. AIG’s areas, with the goal of remediating these material weaknesses
Chief Compliance Officer, who reports directly to this Com- by year-end 2006. However, due to the nature of the
mittee, has implemented a corporate level, centrally-managed remediation process and the need to allow adequate time after
compliance function and developed a compliance framework, implementation to evaluate and test the effectiveness of the
within which AIG is implementing consistent compliance controls, no assurance can be given as to the timing of
policies and procedures for all major business units. achievement of remediation. AIG recognizes that further
AIG has expanded the scope and activities of the corporate improvement in its internal control over financial reporting
level Complex Structured Finance Transaction Committee, to and consolidation processes is essential. Over time, AIG
review and approve transactions that could subject AIG to intends to reduce its reliance on the utilization of consultants
heightened legal, reputational, regulatory or other risk or to supplement current resources and the manual controls that
enable a third party to achieve an accounting or financial have been established. As part of its remediation efforts, AIG
reporting result inconsistent with applicable accounting princi- intends to develop new systems and processes which will allow
ples, to include the review and approval of AIG’s accounting it to rely on front end preventative controls which will be
and financial reporting of identified transactions, including more sustainable over the long term. AIG recognizes that to
related party transactions. Also, AIG’s major business units accomplish its goals, further strengthening and investment are
have implemented their own committees and processes to needed in accounting and tax personnel, as well as in systems
enhance their ability to identify, analyze and present for and processes. AIG is committed to making the investments
approval complex structured finance transactions to AIG’s necessary to make these improvements.
corporate level committee. AIG has taken specific remediation steps with respect to its
Although AIG continues to develop further enhancements three remaining material weaknesses.
to its control environment, based upon the significant actions Controls over certain balance sheet reconciliations: AIG has
taken, as listed above, and the testing and evaluation of the implemented the following measures to enhance its ability to
effectiveness of the controls, AIG management has concluded
that remediation of the material weakness in AIG’s control
environment has been achieved as of December 31, 2005.
AIG m Form 10-K 141