An AIG representative said the activity involved had generally been corrected eight years ago and stressed that the company was cooperating with the inquiry.

New York officials said the practice to be audited, now “apparently” discontinued, involved booking premiums for workers' comp coverage as premiums for general liability. They said the activity appears to have gone on for over 10 years, and continued even after AIG insiders repeatedly challenged its legality.

It was explained that by booking the premium income as something other than workers' comp, AIG avoided paying its true share into various workers' comp funds.

An insurance department representative, Mike Barry, explained that among the operations insurers pay into is the State Workers' Compensation Security Fund. Carriers pay 1 percent of the total premiums they collect for workers' comp insurance.

The fund pays the obligations of insolvent insurers to injured workers. It currently makes payments to 7,500 workers.

According to the officials, one AIG document dating from the early 1990s roughly estimated an unlawful benefit to AIG of tens of millions of dollars annually. The audit consultant, they said, will determine what portion of this money, if any, is owed to New York or others.

The probe of AIG by the two agencies found that in 1992, an internal AIG legal memorandum to top management reported that the practice was illegal and followed similar warnings made years earlier.

At this point investigators have not determined when the practice stopped, according to the state officials, who said there is no evidence that AIG disclosed the practice to regulators or made restitution.

An AIG representative, Chris Winans, said the accounting referred to by the regulators “largely had been corrected by 1997. As we have said in the past on all regulatory matters, we are committed to being as cooperative as possible.”

The information disclosed by Mr. Spitzer and Mr. Mills was turned up as part of an internal AIG review being conducted by two law firms–Paul, Weiss, Rifkind, Wharton & Garrison and Simpson Thacher & Bartlett.

The announcement by the New York authorities was followed by word that the California Insurance Department would look into AIG's workers' comp premium reporting as well. Norman Williams, a representative for the department, said it would examine if any such irregularities occurred involving AIG and other workers' comp insurers writing in California.

AIG has been undergoing an intensive in-house investigation to restate various items in its 10-K annual report filing with the Securities and Exchange Commission.