Parmalat case. Accounting fraud and accounting issue.

Accounting Fraud:-
Fraud may be defined as intentional concealment of facts and figures so as to deceive the other party or
users of financial statements. It may also include giving true & fair opinion on the financial statements of
the company even after knowing the truth and loopholes.
Fraud in the financial may be of various types depending on the use of financial statements.
If the intention is to collect huge funds from the public then company may present financial statements so
as to show huge profits and good solvency image with a view of leaving a positive image in the minds of
users that company will be able to pay off the debts on time and with adequate return.
In the process of showing huge profits and good solvency position, companies manipulate the accounts by
inflating the sales or reducing the wages. In order to show good solvency position cash may collected
from inoperative activities like through Sale of assets, through collection of debt etc. But the analysts
should analyze the financial statements properly and check whether cash on the assets side is collected
through operating activities or from in operating activities. This game does not last for long and when it is
detected it may declare the company as bankrupt. Thus, responsibility lies in the hands of analysts and
users to analyze the balance sheet properly and it is the duty of auditors to conduct the audit by examining
the books of accounts properly so as to give independent true & fair view on the position of financial
statements.
The fraud discussed above occu
ed in Parmalat case which is discussed as below.
Background of the firm
Being eighth largest company of ITALY, Parmalat was dealing in dairy food products. It employed nearly
36,000 people being the leader in dairy food business. Defendant Calisto Tanzby founded the company in
1961 to ca
y on the business of international food and dairy products. Tanzby being the founder, the
control of business was in the hands of Tanzi family.
In the thought of expanding the business globally, company entered into various acquisition programs.
Many food services were acquired in Europe, South America and United States. Out of the total sales,
around 76% sale of products was made outside Italy. By 2003, the annual sale of the company reached $5
illion with employees of around 3100 in number. By this time company has already expanded its
usiness in Alabama, Georgia, Michigan, New Jersey, New York and Ohio. The business operations were
ca
ied out in around 30 countries but substantial part of operation was in Italy, Spain, Canada, Brazil,
Venezuela, Colombia, South Africa, and Australia.
Although it was declared as the worlds eight largest company, when truth was detected and company was
about to be declared as insolvent, it represents the biggest accounting scandal in the history. The case has
een the biggest in Europe Corporate Scandal. The company was going bankrupt from a long time but
efore the situation was finally exposed many events took place.
Two types frauds were detected namely: - Financial Fraud and a securities fraud. Following activities
were involved in fraud:-
1. Manipulation of Assets and liabilities in the Balance Sheet.
2. Falsifying the financial statements like income statements by introducing the dummy transactions.
3. Fictitious investments were shown so as to inflate the assets of the company.
4. Financial Statements showed repurchase of bonds of value €2.9 billion, whereas the depiction was
totally false.
5. Huge amount of cash was shown whereas in reality the actual amount of cash owned by the company
was only €500 million. In addition to this, data by CFO of the company was presented as €10 billion
whereas balance sheet showed much more than this.
Some of the events that took place are discussed as follows:-
In 1990, there were indications that the Company was in debt. In 1991, company acquired Parma Football
Club. Stefano, Tanzi's son was declared as president, and was included in the board member of Parmalat.
The business of the football club rose rapidly but soon a deficit of over €77m was declared in 2002 due to
heavy losses.
Several acquisitions continued with the acquisition of competitors and a TV network, Odeon TV.
Parmalat Milk was also established in the global market but with this time financial position was very
poor.
Acquisition of Odeon TV network proved to be a wrong decision and business had to be sold off at
nearly £30m.Inspite of huge losses in reality, company still progressed by manipulating books of
accounts. In addition to this, loans and investments were taken from banks & financial institutions
through fake figures. The acquisition of Odeon TV was for around €130 million but it started incu
ing
losses in 3 years. To safe itself from bankruptcy, the company decided to sell itself in the hands of a
company listed on the Milan stock exchange. With this demerger, the company was able to collect €150
million and these improved books of accounts slightly.
In order to attract many investments and avoid suspection of losses every year, the company window
dressed its financial statements from 1993 because if it had not done so, the company must have
egistered huge losses in its income statement. Through fictitious transactions company managed to cover
its losses. On the one side company was not able to cater its own needs, yet it dressed up its accounts so
well that Bank of America alone sanctioned $1.7 billion.
The main contribution in the detection of accounting scandal was change in the external auditors. As per
Italian Law, auditors are rotated on the expiry of 9 years. Thus, after the expiry of 9 years, Grant
Thornton discontinued its...