Something Went Sour at Parmalat

724 Words Nov 10th, 2015 3 Pages
Something went sour at Parmalat

The Italian dairy food corporation Parmalat SpA was founded by Calisto Tanzi in 1961 and grew to a global company. It had about 140 production centers, 36,000 employees and 5,000 contracted dairy farms (https://en.wikipedia.org/wiki/Parmalat). The dairy food giant defaulted on debt in November 2002 and filed bankruptcy in December 2003. It sounds ridiculous because Parmalat’s subsidiary in Cayman Islands had a $4.9 billion cash balance in Bank of America account. However, this account was falsified. Meanwhile, Parmalat also hid losses of $10 billion and increasing assets as high as $19 billion. The auditors did not show enough professional skeptism and due care during the audit.

1. What steps does an
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Actually, in NY 10001, Bank of America does not have any office address beginning with “100”. Since the case took place 12 years ago, Bank of America may move its offices, but auditors can still check it when receiving the letter.

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.

3. What red flags did the auditors miss?

There are several red flags: (1) The large size of the bank account. The account represents 38% of Parmalat’s assets. It is not normal for such a big company having so much money in a single account. (2) The location of the account. Parmalat deposited money in a foreign bank made it hard to confirm the balance and direct communication between the bank and the auditors. (3) It is not understandable Parmalat raised more than $5 billion debt when it had $4.9…

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