AMERICAN INTERNATIONAL GROUP, INC.
70 PINE STREET, N.Y. 10270
PHONE: (212) 770-5426
FAX: (212) 425-2175
ERNEST T. PATRIKIS
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
September 25, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: SEC File No. S7-13-00: Proposed Revision of the Commission's Auditor Independence Requirements, Specifically Proposed Rule §210.2-01(c)(1)(ii)(F)
Dear Mr. Katz:
We are writing to comment on the referenced proposal. Although we wholeheartedly agree with the Commission's objective of ensuring that investors can place the strongest faith in issuers' financial statements, we are very concerned that the adoption of this rule could potentially have an adverse impact on the investing public.
American International Group, Inc. (AIG) is the leading U.S.-based international insurance and financial services organization and the largest underwriter of commercial and industrial insurance in the United States. Its member companies write a wide range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries and jurisdictions throughout the world. AIG's global businesses also include financial services and asset management, including aircraft leasing, financial products, trading and market making, consumer finance, institutional, retail and direct investment fund asset management, real estate investment management, and retirement savings products. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in London, Paris, Switzerland and Tokyo.
In general, the proposal provides that an auditor's independence is impaired in circumstances where 1) the accounting firm, any "covered person," or any immediate family member of a "covered person" holds an individual insurance policy originally issued by the audit client, and 2) an audit firm obtains professional liability coverage from an insurer that is an audit client.
The provision relating to individual insurance policies appears to address the concern that a covered person's personal financial interest in an insurance company's ability to pay its claims when due could conflict with his or her professional responsibilities to provide an independent assessment of that company's financial strength. In practice, however, it seems implausible that an auditor's independence would be impaired by such holdings. Insurance is a highly regulated industry, with comprehensive state regulations that govern all facets of insurance operations and promote solvency. Furthermore, in those infrequent circumstances where a company falls through the regulatory safety net, state guaranty funds exist to protect the interests of individual policyholders. We believe these protections more than adequately protect against the potential of impairment reflected in the rule. In addition, we are unclear as to why this provision does not give recognition to the protections provided by state guaranty funds in the same manner as the recognition given to FDIC insurance for checking and savings accounts and SIPC advances for broker-dealer accounts. We are also unclear as to why the purchase of individual insurance policies are singled out for more restrictive treatment than any other product or service that a covered person may purchase from an audit client that is expected to stand behind its product or service (i.e. through explicit product warranties or otherwise).
With regard to professional liability coverage, a critical component of reliable independent auditing is that accounting firms have the financial wherewithal to effectively meet its professional obligations by ensuring that adequate human, technological, and other resources are committed to performing thorough, high quality audits. Financial wherewithal also serves as a source of strength in demonstrating an accounting firm's ability to stand behind its work. An important contributor to an accounting firm's financial security is the availability of professional liability insurance. The market for professional liability insurance is quite limited and is generally provided by the largest and most sophisticated insurance companies. Furthermore, the typical professional liability insurance needs of a large accounting firm often exceed the capacity of one insurer and requires obtaining coverage (especially over a period of years) from most or all of the insurers that participate in this market. Conversely, the largest and most sophisticated insurance companies are generally most in need of the comprehensive resources and services only the largest accounting firms can provide. Consequently, if accounting firms are barred from obtaining coverage from audit clients, there is a significant risk that these firms will not be able to secure the coverage they need to perform at their most effective levels. This result certainly would not benefit the investing public.
In summary, while we appreciate the difficult task of the Commission in protecting investors against potential conflicts and we agree with the Commission's objectives, we do not believe this specific proposal accomplishes the task. Indeed, this proposal could actually diminish the availability of legitimate and important protections for auditing firms and/or denying insurance companies access to the most qualified auditors. These results should be avoided.
Thank you for your consideration of our concerns.
Yours very truly,
Ernest T. Patrikis