Assignment
Crisis at Parma at
In little more than a fortnight in December 2003, the Italian dairy conglomerate became engulfed in Europe's biggest financial fraud as some e10bn to e13bn were found to have disappeared from its accounts. Deloitte, Parallax's chief auditor, did not do its own checks on some big bank accounts at one of the Italian dairy group's subsidiaries that turned out to be fakes. As a result, in December 2003, a major scandal broke after the disclosure that Bonlat, a Parmalat subsidiary in the Cayman Islands, did not have accounts worth almost e4bn (£2.8bn) at Bank of America (B of A). Eventually this ‘lost' money was found to be three times greater. Bonlat's auditor is Grant Thornton and B of A told it in January 2004 that a document purportedly showing accounts with cash and securities worth e3.95bn was fake. The document was used by Grant Thornton as part of its work on Bonlat's 2002 accounts, which were then consolidated into Parmalat group's 2002 financial statements. Deloitte, one of the big four global accounting firms, did not make independent checks on the authenticity of Bonlat's supposed accounts with B of A, according to people close to Parmalat and familiar with the investigations into the company. These people said Deloitte believed it was entitled to rely on Grant Thornton's work on Bonlat, rather than do its own checks, and such an arrangement was permitted by Italian law and regulators. They also said that the division of work between Deloitte, as chief auditor, and Grant Thornton, as auditor to Parmalat's subsidiaries, was agreed with the company and notified to Consob, Italy's chief financial regulator. Deloitte strongly denies any wrongdoing. It denies acting negligently or being complicit in the alleged massive fraud at Parmalat, according to people close to Parmalat and familiar with the investigations. These people said that Deloitte believed it had been misled by Parmalat. Deloitte's relationship with Grant Thornton, a medium-sized accounting firm, appears to have become strained during the second half of 2003. Deloitte raised concerns about Parmalat's 2003 interim results because of issues initially raised by Deloitte, rather than Grant Thornton, according to people close to Parmalat. In October 2003, Deloitte declined to authenticate the value of Bonlat's mutual fund in Cayman. It also refused to approve a gain on a derivatives contract held by the fund. Deloitte's concerns about Parallax's accounts focused on its financial companies such as Bonlat. It qualified the accounts of Parma at Soporific, a Luxembourg subsidiary, in 1999, 2000 and 2001. Parma at personnel systematically created assets and records to accompany them, which were non-existent, according to people close to the company. Deloitte said it did not know if the e3.95bn of cash and securities supposedly held by Bonlat was fictional or had been placed somewhere other than B of A. Deloitte was increasingly reliant on Grant Thornton for verification of Parallax's consolidated assets. In 1999, Grant Thornton certified 22% of Parallax's assets, but it rose to 49% in 2002. But Deloitte had to verify at least 51% of Parmalat's assets because of its role as chief auditor.
Question
1 What were the causes of the collapse of Parma at?
2 Why have some blamed the auditors for the collapse, as well as dishonesty at Parma at itself?
3 What lessons might be learned from this case study?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.