What specific audit procedures might have uncovered the Parmalat fraud earlier? Parmalat went from recording annual sales of 7. 6 billion euros in 2002 to being declared insolvent a year later. The collusion at Europe’s Enron made it possible for Parmalat to defraud its investors of billions. The auditing procedures used by Grant Thornton and Deloitte were inadequate. Many of Parmalat’s assets were overstated and its liabilities understated. The auditors did not adequately test the Special Purpose Entities or the off-balance sheet transactions.
One of the most basic auditing procedures is testing for existence. By testing these accounts for existence and looking further into them, the auditors could have uncovered that they were formed by Parmalat and that they were being used as debt shelters. The illusion of liquidity would have been gone and the fraud would have stopped far earlier. Deloitte was not able to uncover the Account 999, which was the key to detecting the fraud. The account was used as a trash bin for all the faked revenues, assets and profits that Parmalat had obtained over the years.
Deloitte should have used more professional skepticism and dug deeper to uncover the fraud. However, all this is not important if Deloitte was colluding with the management of Parmalat to help the fraud continue. In that case, the Deloitte company should have kept a closer eye on the Italian section of the company. There should have been an internal investigation right away when some of the other Deloitte global offices sensed a risk of fraud in the Parmalat affair. Auditors must be independent from the company that they are auditing.
If there is collusion, then fraud can easily occur. Independence was clearly missing in this case. By placing too much faith in the integrity of the managers and the competence of its auditors, the company became susceptible to fraud. The auditors should have had proper procedures in place to detect at least some of the 200 companies that were created by Parmalat to create an illusion of liquidity. The fake documents sent by the CFO should have been more thoroughly examined and letters should have been mailed out to these companies to confirm the amounts that they owed Parmalat.
