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Continuous Assessment Project 2012| Parmalat: Avoidable or Inevitable?|

Continuous Assessment Project 2012| Parmalat: Avoidable or Inevitable?|

To:
From:
Date: Friday 16th November 2012
Subject: Parmalat: Avoidable or Inevitable?
Question 1 – Methods used to perpetrate the fraud
According to a study carried out by Andrea Melis “Parmalat is about creative accounting in the sense that, among other items, some assets were “created” in order to give a “rosier” picture of the corporate group rather than a “true and fair” view of its financial position and performance”. Parmalat employed two different methods to perpetrate the fraud at Parmalat; misstatement resulting from fraudulent financial reporting and misstatement resulting from misappropriation of assets. Fraudulent financial reporting “involves intentional misstatement including omissions of amounts or disclosures in financial statement to deceive financial statement users”. (ISA 240) This is used by management to mislead financial statement users on the performance and profitability of the entity. Management can accomplish this by manipulation, falsification or alteration of accounting records and misrepresentation of transitions. Management override of controls is usually involved in this type of fraud. Misappropriation of assets “involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts”. (ISA 240) Management can also be involved and are usually better able to disguise and conceal the fraud so it is difficult to detect. This can be accomplished in a number ways such as embezzling receipts, stealing physical assets or intellectual property, payments to fictions vendors and using entity assets for personal use. Misappropriation of assets is often used with fraudulent reporting to conceal the missing asset. Parmalat was a large firm which owned many subsidiaries outside Italy. Parmalat used its subsidiaries to move large liabilities out of the firm. This method of fraud was aided by the fact Parmalat and its subsidiaries had different financial auditors, the subsidiary was in the Caribbean far away from the Italian headquarters and auditors often have difficultly detecting this type of fraud. Parmalat carried out fraudulent reporting activities such as using “derivatives and other complex financial transactions to shore up its balance sheet”. The entity carried this out by investing money received from Citigroup in return for a piece of the company net profit. This ensured the transactions were recorded as an investment rather than a loan. Management at Parmalat implemented a number of fraudulent accounting practices including fraudulent treatment of current asset investment, debenture loans and nature of intercompany financing agreements. Numerous companies “were set up to generate fake profits for Parmalat and subsidiaries”. The finance director of Parmalat admitted to part taking in a “cut and paste” forgery. Letterhead documents were scanned to create a Bank of America deposit account. “The document was then passed thought a fax machine several times in order to appear authentic”. Ability to continue with the fraudulent practices for prolonged period Parmalat’s ownership

The Tanzi family had a large shareholding in Parmalat, which directly or indirectly controlled just over 50% of the voting shares. This ensured they had adequate power to control Parmalat to better their own interests, and that other shareholders would have difficulty questioning the internal controls at Parmalat which therefore enabled management to continue with the fraudulent practices. The board of directors at Parmalat was dominated by corporate insiders. Four of the thirteen members of Parmalat’s board were family members, while eight of the Parmalat directors were also directors of subsidiaries of the group. One of Parmalat’s non-executive independent directors was a family friend of the Tanzi family....
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