1983, Allied Irish Banks plc (AIB) acquired the Insurance Corporation of
Ireland (ICI). Shortly afterwards, ICI
got into difficulty and sought a substantial injection of funds, which AIB was
not in a position to provide. ICI was effectively bankrupt, and in March
1985 the Irish Government agreed to purchase the ailing subsidiary for a
nominal sum. The Government’s intervention was perceived as preventing a
financial crisis in the entire banking sector.
of AIB’s accounting treatment provides evidence of a classic case of earnings
management. In both 1986 and 1992, AIB failed to provide for the full cost of
support arrangements provided to the Government/Central Bank, after the State’s
purchase of ICI. Following a change in accounting policy, these costs were
recognised in full in AIB’s financial statements for the year ended 31st
December 1993. This change of policy coincided with the settlement of a legal
claim with the auditors of ICI.
Bank’s dividend policy is identified as a key driver of its earnings management
strategy, as is the pressure that is likely to have been exerted by AIB’s large
paper contends that AIB’s accounting treatment of its losses, following the
collapse of ICI, bears a parallel to the failure of the banks to reveal the
true fall in the value of their loan assets at the time of the Irish
Government’s bank guarantee in 2008. It seems that little has been learned from
the lessons of the past, a fact that is likely to be reflected in the future
regulation of the Irish banking sector.