Parmalat Case free essay sample

Something Went Sour at Parmalat Parmalat is a multinational Italian dairy food corporation that today represents one of the biggest fraud scandals that has marked history in Europe. What happened and why weren’t the scandalous activities detected beforehand? Parmalat’s investigation was triggered when it â€Å"defaulted on a $187 million bond payment in mid-November 2002. † This led to further revelation of the nonexistence of $4 billion worth of claimed bank deposits held by a subsidiary in the Cayman Islands in a Bank of America account.The company was basically falsifying accounts in order to increase assets and hide losses. The increase in assets would influence the public to believe that they were in a good position which in turn allowed them to continue borrowing money from investors and creditors. Grant Thornton was the company’s auditor from 1990 to 1999, but that changed when the company was forced to change auditors under Italian law. Grant Thornton remained in charge of auditing services provided to off-shore subsidiaries located in the Cayman Islands. We will write a custom essay sample on Parmalat Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Fraud related activities continued to be discovered when the new appointed auditor, Deloitte Touche Spa, received a forged letter that confirmed the existence of the nonexistent account. Further investigation resulted in the company’s filing for bankruptcy protection against the revelation of massive missing or nonexistent funds previously reported by the company. This fraudulent scandal raises concerns on the auditing procedures practiced during these years because they clearly failed to detect the nature of these activities for a long period of time.In this next section I will address the possible errors committed by auditors when investigating Parmalat. An auditor ordinarily takes certain steps when confirming cash balances held on deposits with financial institutions. The correct process should be initiated with an inspection of bank statements obtained directly from the client’s financial institution. Was this achieved? Deloitte definitely requested this confirmation, but requesting a confirmation is not always enough.As auditors, they have the responsibility of not only requesting a confirmation, but they should also follow up on necessary procedures to make sure that this process is accurately completed. Their duty is to be able to have control over this process from beginning to end in order to be able to rely on the evidence requested. Additional steps should have been taken by the auditors when they received the smudged fax copy printed on the Bank of America letterhead. As mentioned before, the evaluation of the evidence obtained is as important as requesting it.The firm did not confirm the forged documents with the bank; for this reason, the evidence remained unreliable and the forgery wasn’t revealed until later. Auditors should have been concerned with knowing where and whom the confirmation letters came from. Was the initial confirmation request mailed directly by Grant Thorton SpA or by Parmalat or was it obtained directly from the bank? Auditors should be aware that confirmations that are sent through fax are much less reliable than confirmations sent by mail. Their duty was to find out if the correct process was altered in any way.Additional concerns have been made in regards to the red flags missed by auditors. First of all, auditors should have been alarmed by the size of the cash account held in the Cayman Islands. Auditors should have remained skeptical about the existence of this account. They should’ve addressed this red flag with questions. Some of these questions might have been: When was this account created? What was the source of the increase in this account and what is the account’s function? Was it typical for Parmalat to have such large sums of cash on deposit in a cash account?Then, why would they continue to borrow money if so much cash was available? De loitte and Touche SpA should have taken additional steps with respect to Grant Thornton’s audit of the Cayman Island subsidiaries. Grant Thornton was no longer the company’s head auditor, but it managed to remain auditing the Cayman Island subsidiaries which actually increased the assets they were in charge off by a big amount. That alone should have been a red flag to auditors in Deloitte and Touche SpA. Fraud had been occurring for numerous years; for this reason, one might be able to wonder if Thornton had any intentions on concealing the fraud.In a typical audit situation, cash is not viewed as a high audit risk area if internal controls are operating effectively. Bank reconciliation is an important internal control; furthermore, a lack of such reconciliation would signal a red flag for potential poor controls. Did Grant Thorton SpA ever send a second confirmation request given the time between the confirmation request and the response? If confirmations are not received on time auditors should be alarmed to perform alternate procedures.