Parmalat Case

When receiving the smudged fax copy, the auditor should prove the confirmation letter. In this case, the auditors can search online or other independent source (i.e. non-client source) to get phone number and email address of Bank of America and contact with the bank immediately. The auditors should also request the original confirmation be mailed directly to the firm. The original confirmation is more convincing to a faxed one.

Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

Auditors play an important role in the banking industry, they should help promote confidence and independence in the financial industry. The auditors work for and act as a go between the shareholders and the corporation. The auditors responsibilities is to make sure the company is in compliance, to detect fraud and report illegal acts. The recent financial crisis revealed many weakness

Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions. It describes the concept of assessing inherent and control risks, determining the acceptable level of detection risk, and designing an audit program to achieve an appropriately low level of audit risk. The auditor uses the audit risk assessment in determining the audit procedures to be applied, including whether they should include confirmation. The greater the combined assessed level of inherent and control risk, the greater the assurance that the auditor needs from substantive tests related to a financial statement assertion.

They discovered that since there had been a modified opinion of the 2006 financial statements, where the auditors raised questions of going concern. The company had suffered persistent losses and the lack of cash flow was impairing their ability to secure financing. They also learned that subsequent auditors had been dismissed also for apparently coming to the same conclusion as the predecessor firm. Upon further investigation the team found that a million dollar loan covenant had been violated by neglect to keep a minimum balance due to the fact that the owner had withdrawn $500,000.00 out of the company account to place a down payment on his home. The next time the covenant was broken the bank started foreclosure on the loan.

It highlights the importance of auditors applying sensitive and ethical judgments in all their engagements. Members have the responsibility to collaborate with each other to improve the art of accounting, as well as to maintain the public’s confidence. The auditor’s responsibilities are essential to an effective audit process because through planning, auditors should to communicate with each other, be very organized and discuss what and how to do things in order to serve the public. One of the most important parts in auditing is planning, for that reason responsibility is a must.

Hogan, Rezaee, Riley, and Velury (2008) noted the development of the auditing standards created due to the financial scandals that have occurred over the years. However, the authors note even with the development of SOX and SAS No. 99 there still does not appear to be a decline in financial statement fraud (232).

The Parmalat situation started out as a fairly standard – although sizeable –accounting fraud. Not even the best auditors could prepare for what was to come from this company. The Parmalat group, a world leader in the dairy food business, collapsed and entered bankruptcy protection in December 2003 after acknowledging massive holes in its financial statements. This happened when billions of euros seem to have gone missing from the company’s accounts. This dramatic collapse has led to the questioning of the soundness of accounting and financial reporting standards as well as of the Italian corporate governance system. Parmalat, which is headquartered in the central Italian city of Parma, was, like most Italian

2. Auditors are required to consider evidence obtained and accumulated throughout the audit and make an overall evaluation as to whether substantial doubt exists with respect to the ability of the client

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

According to the internal inspection report of the Societe Generale, certain control was absented throughout a period of time. This absent of certain control indicated that a fraud is occurred and alerted the company about it. However, even though Societe Generale is able to identify the problem, the compliance inspector of the company only conducted a routine reviews and did not have a deep detail checking on issues. Besides, the compliance inspector did not asking for any additional information from Kerviel and simply accepted Kerviel’s claims without putting any effort to validate it. Due to this, its shows that the compliance inspector of the bank is failed to identify the cause of the problems occurred which caused by the lack of

The purpose of an audit is to enhance of confidence in the financial statements. An auditors opinion validates this purpose.

A number of financial statement frauds went undetected from auditors in past and attracted a high profile attention. The businessmen add fake assets or transfer the assets of companies to their personal assets and result in accounting scandals when the affected companies are bankrupted or are even close of bankruptcy. Just to mention a few names, accounting scandals of Enron, AOL Time Warner and Xerox are among the hottest accounting scandals of the century. This means that despite presence of professional auditors accounting scandals happen and there is a need to learn from the mistakes of the auditors who overlooked these activities. In this report the case study of Xerox is analyzed in detail to highlight violations of accounting principles and present an example from which lessons can be learnt for the future.

In 2003, the threads holding Parmalat’s fraud together quickly began to unravel. To back up the existence of the Cayman Islands account’s funds, Parmalat had been using a letter allegedly written to them from the Bank of America to confirm that a transfer of the funds had been made. However, after brief scrutiny it was revealed that the letter had been forged, and so the funds did not exist. As the scandal was put under further scrutiny, it was revealed that Parmalat had not only been lying about the money in the subsidiary, but about various other assets as well. The accountants working for Parmalat had essentially invented assets out of thin air to offset their expenses and liabilities, and were lying about revenues as well. After thorough investigation it was determined that Parmalat was $17.6 billion* in debt. Trade of their stocks was immediately suspended.