This is what we mean by holding one's feet to the fire: American International Group Inc.'s auditors told the giant insurer that its credit-portfolio's valuations were flawed, forcing AIG to take a $4.88 billion write-down.

That bombshell wasn't expected. Chief Executive Martin Sullivan had been telling investors AIG had ''high degree of certainty'' that it wouldn't have to book major write-downs even as other financial companies tallied $140 billion in credit-related charges over the last year.

Investors had to take the company at its word; its auditor, PricewaterhouseCoopers, did not. And thanks to the Sarbanes-Oxley corporate reform law's disclosure requirements, the public was told that the auditors spotted a deficiency in the company's books.

That certainly pours cold water on Sarbox critics who have been lobbying for the 2002 law to be rolled back. They complain of the financial burdens that go along with the laborious task of reviewing companies' internal controls to make sure their financial processes are properly in place.

You won't find many AIG shareholders complaining about those costs now. Monday's news from AIG shows they've gotten their money's worth.

''In the post-Enron era, it is imperative for auditors to have more courage and power, which is what we are seeing here,'' said Edward Ketz, associate professor of accounting at the Smeal College of Business at Pennsylvania State University and co-author of the book ''Fair Value Measurements.''

Before the last week, the message coming from AIG management was a resounding ''don't worry.'' Even though much of the financial world seemed to be getting rocked by the paralysis wrecking credit markets that has devalued risky debt, AIG wasn't feeling much pain.

AIG's credit-related hit was expected to be relatively modest compared to the super-sized write-downs booked at firms such as Citigroup, Merrill Lynch and UBS.

As of Sept. 30, AIG recorded a $352 million unrealized market valuation loss on its portfolio of credit default swaps, which protect fixed-income investors against default of certain securities like collateralized debt obligations. CDOs have been hit hard because of their exposure to subprime mortgages, which have been defaulting at alarming rates.

In its third-quarter earnings release on Nov. 7, AIG disclosed that it expected an unrealized market valuation loss for October of about $550 million. By early December, it raised its expected losses for October and November combined to $1.05 billion to $1.15 billion.

''We cannot predict the future ... but we have a high degree of certainty in what we have booked to date,'' CEO Sullivan said at an investor conference on Dec. 5, according to a transcript provided by Thomson Financial.

That's why Monday's news came as such a shock. In a securities filing, AIG said that it had to lower the value of those insurance contracts it holds by an estimated $4.88 billion, before tax, for October and November _ almost four times what investors had been expecting.

The updated valuation didn't even account for December, meaning additional write-downs could come since credit conditions deteriorated as last year ended.

Auditor PWC forced AIG to lower its valuations. PWC found ''material weakness in its internal controls over financial reporting and oversight'' relating to its accounting for the contracts, AIG said.

In simple terms, analysts said the auditors seemed to take issue with the method that AIG used in its mark-to-market valuations on those derivatives when there has been no active market for the debt. AIG had been using certain so-called negative basis adjustments, which lowered their mark-to-market losses; it has done away with that.

Citigroup analyst Joshua Shanker noted that removing that benefit forced the drop in the company's gross valuation to grow from $352 million on Sept. 30 to nearly $6 billion two months later.

AIG said Monday that its assessment of internal controls is ongoing. It noted that it ''believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value'' of the credit default swap portfolio.

Separately Tuesday, the company noted that the mark-to-market valuation declines don't indicate the level of actual losses the insurer may incur in future and said they will ''not be material'' to AIG.

So investors are supposed to feel better now? Try again. They sent the stock down 12 percent on Monday's news to just under $45 a share, and it hasn't moved much since.

AIG has long been considered too complex for most investors to analyze, and has relied too often on ''trust me'' statements. This news reinforced the downside of that. At least we can thank Sarbox for giving investors a little peak into AIG's black box.

Source: Associated Press