What A Tangled Web We Weave: AIG’s Cassano Says He Told PwC Everything

Joseph Cassano, the former head of AIG’s Financial Products Group, testifies today for the Financial Crisis Inquiry Commission, a bipartisan commission with a critical non-partisan mission — to examine the causes of the financial crisis.

“He headed up AIG Financial Products,” Phil Angelides, chairman of the bipartisan commission, said Tuesday. “He was at the center of this. He was a person extra-knowledgeable about the inner workings of that company and its relationship with others.”

The Department of Justice cleared Mr. Cassano in May. No criminal charges will be filed. U.K.’s Serious Fraud Office dropped probes last month, and the U.S. Securities and Exchange Commission also closed their investigations too. Mr. Cassano was villainized by the press and his own former company for not keeping anyone informed of the potential losses on his portfolio and making misleading statements to investors including the auditors, PricewaterhouseCoopers.

But the investigations went aground when, “prosecutors found evidence Mr. Cassano did make key disclosures. They obtained notes written by a PwC auditor suggesting Mr. Cassano informed the auditor and senior AIG executives about the adjustment…[and] told AIG shareholders in November 2007 that AIG would have “more mark downs,” meaning it would lower the value of its swaps.”

So who’s telling the truth?  Was PwC duped by AIG?  Who is looking out for AIG shareholders and now, the US taxpayer in this mess?

“Based on my reading of the Audit Committee minutes, I believe that PwC was aware of weaknesses in internal controls over the AIGFP super senior credit default portfolio throughout 2007 and prior.  Why were they pussy-footing around still on January 15, 2008 as to whether these control weaknesses were a significant deficiency (which would not have to have been disclosed) or a material weakness (which eventually was)?”

Cassano says he told the auditors everything.  Unfortunately for AIG and PwC, that excuse is contradicted by AIG’s statements during an earlier, similar crisis in disclosures and accounting. Why didn’t the Department of Justice and the SEC see this pattern of cover-up between AIG management and its auditors and the lack of independence of the auditors, PwC?

The Wall Street Journal in May of 2005: Pricewaterhouse’s Squeeze Play

AIG Says It Misled Auditor, As Greenberg Cites Review Clearing Internal Controls

The insurer’s latest release offered some relief for the accounting firm: It noted that “in certain instances,” improperly booked transactions “may also have involved misrepresentations to management, regulators and AIG’s independent auditors.”

Specifically, the company said Pricewaterhouse wasn’t told in full about AIG’s ties to or dealings with two offshore reinsurance companies that AIG, because of the internal reviews, now plans to consolidate into its financial statements… Although Pricewaterhouse received a subpoena from the SEC in February seeking documents about AIG, regulators aren’t focusing on the accounting firm… AIG also acknowledged that former executives at times had been able to “circumvent internal controls over financial reporting.” As a result, AIG said Pricewaterhouse likely will fault the insurer’s internal financial controls in the annual report to come even as it is likely to give the insurer “unqualified” opinions on its financial statements as well as its assessment of its internal controls…AIG said one reason its internal controls didn’t pass muster was the ability of “senior management” to get around the safeguards. “

PricewaterhouseCoopers has been playing consigliere to AIG for many, many years and continues to be allowed to act as their “independent” auditor in spite of the fact that they have been sued by AIG’s shareholders and are now turning their own partners against their client in court.

If PwC was informed about Cassano’s activities, then perhaps the SEC, the PCAOB and Department of Justice should finally turn their attention towards the audit firm.  Maybe they can take a look at how they played their two clients, AIG and Goldman Sachs, against each other regarding the valuation of the same set of assets?

Why would either AIG or Goldman Sachs keep a firm like PwC around, one that adds no value, provides no guidance other than a nod of the head and turns on you to save their own skin when expedient?  Well, it may be a prime example of the old adage, “Keep your friends close and your enemies closer.” PwC knows where the bodies are buried and PwC has been willing to go along with the program all these years.  It’s a pain in the neck to train a new auditor.

What’s in it for PwC?  $205 million in fees from AIG in 2009, an increase of 43% from 2008. PwC earned $107 million from Goldman Sachs in 2009, an increase of 7% from 2008.

That sounds like $312 million reasons for PwC to go along with the charade of independence.