New Twist in AIG Inquiry

The giant insurer may have shortchanged New York on workers' compensation payments.
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Updated from 11:25 a.m. EDT

The investigation into

American International Group's

(AIG) - Get Report

accounting practices is taking a new twist, with allegations that the giant insurer may have shortchanged New York on making workers' compensation payments.

Early Tuesday, New York Attorney General Eliot Spitzer and New York Superintendent Howard Mills announced they were investigating the matter to determine how much money AIG might owe the state.

Lawyers hired by AIG to review its bookkeeping apparently discovered that for many years AIG had been misreporting workers' compensation premiums to state insurance regulators. The big insurer allegedly recorded some workers' compensation premiums as general liability premiums, even though corporate insiders had determined the practice was illegal.

The practice has since stopped, but state regulators said it appears to have gone on for over a decade. The erroneous bookkeeping may have enabled AIG to boost its reported general liability premiums by "tens of millions of dollars annually," the regulators said in a joint press release.

Additionally, the misreporting enabled AIG to avoid paying its fair share into various state workers' compensation funds. The money is used to finance the operations of the state workers' compensation board.

"In 1992, an internal AIG legal memorandum to top management reported that the practice was illegal," according to a joint press release from the state regulators. "It remains unclear when the practice stopped."

AIG spokesman Chris Winans said: "This practice largely had been corrected by 1997."

The lawyers hired by AIG to review the insurer's accounting practices recently completed their report. The preliminary findings have been shared with regulators.

In conjunction with the internal review, AIG is preparing its 2004 annual report, in which it will likely restate earnings for the past several years. The company has said previously that it could restate earnings by as much as $1.7 billion, but many expect the final number to be higher.

AIG's stock was recently down 43 cents, or 0.8%, to $51.33.