In this memorandum, I will address the incentives that Michael Joseph and the E&Y audit team had in the AIG case. Joseph and the audit team violated the AICPA Code of Conduct, particularly for section 90 and section 101. In addition, Joseph violated the AICPA section 50 pretending that he had not talked to the audit team.
According to SEC, Michael Joseph should have know that PNC’s SPE (Special Purpose Entities) transactions were not in compliance with GAAP. Also, Joseph’s dual role in both AIG and PNC resulted in a conflict interest for him. However, Joseph still chose to cooperate with AIG in issuing report stating that the nonconsolidated accounting treatment was an appropriate application of GAAP. Several incentives pushed him to do so. First, since AIG had an extensive role in global credits and insurance markets, to build a positive relationship with AIG for Joseph was beneficial in the long-term. As Joseph accepted the offer from AIG, the potential buyers went to Joseph to consult accounting-related issues, which raised Joseph’s reputation as well. In addition, working for such a big company as AIG brought Joseph huge economic return, which could be another incentive for Joseph to take the risk.
The E&Y audit team for PNC directly contacted Joseph to determine whether PNC’s proposed SPE would be GAAP-compliant. On one hand, PNC’s external audit firm was E&Y so that E&Y should take the responsibility to handle the SPE issues. On the other hand, the E&Y audit team did not want to challenge their partner, Joseph, on the appropriateness of the SPE’s accounting treatment. So, the audit team relied on Joseph’s report without performing any meaningful separate analysis.
VIOLATION OF ET90 AND ET101
Joseph and the E&Y audit team for PNC violated the AICPA section 92 and section 101. As the AICPA Section 92 defines, an attest engagement is an engagement that requires independence as defined in AICPA Professional Standards. Thus, the...