Parmalat Case

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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 “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. 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...
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