Parmalat is a multinational company operating in the food processing industry. The company was founded in 1961 in Italy. The company collapsed in 2003. Prior to its collapse, Parmalat was the leading international company in the production of ultra high-temperature (UHT) milk. Currently, Parmalat’s global presence is in Europe, Australia, North America, China, South Africa and Latin America. The company is a subsidiary of Lactalis, French Group Company. The main products manufactured by the company include UHT milk and milk derivatives such as yoghurt, ice cream and butter. The company has a total of 140 production centres. There are more than 36,000 employees. Parmalat is a public company whose shares are listed on the BorsaItaliana stock market.
In 2007, Parmalat started financing international acquisitions in the world financial markets. The company spent a lot of resources on the expansion strategies. In 2011, the company’s new divisions were making losses. The company adopted the use of derivatives as the new financing method. The company was faced with a risk of bankruptcy due to the huge investments in international mergers and acquisitions. It was also discovered that the accounting managers were reluctant in posting entries in to the correct ledger. The books of accounts were not accessible to other financial officers such as the Chief Accounting Officer, Luciano Del Soldato. The company books of accounts were not properly checked by the top management and internal auditors.
The public company accounting oversight board (PCAOB) is a non-profit making corporation. The Sarbanes-Oxley Act led to the creation of the board in 2002. The aim of the formation of the board was to provide guidelines on how auditing of public companies should be carried out. Its purpose was to protect the shareholders and investors interest. Public companies practice stewardship accounting. In stewardship accounting, the shareholders provide resources to an organization. The management of the public company should invest in projects that are going to maximize on shareholders’ wealth. Shareholders wealth is the product of the number of shares and the market price of the shares in the capital market.
Issue that undermined the credibility of audit issued by grant thornton and deloitte & touche
Lack Of Peer Review
Peer review can be defined as an independent review of a company’s accounting and auditing standards. Peer review is normally carried out by practitioners after their fellow practitioners have carried out the actual accounting and auditing of the company’s annual financial statements. The main aim of peer review is to increase the credibility of the audit reports. In addition, peer review helps to increase user confidence in the audited financial statements.
It also helps in providing reasonable assurance to the users of the financial statement that the accounts present a true and fair view financial position of the company.
In the case of Parmalat Company, there is no evidence that peer review was carried out before issuing the audit report. Failure to carry out peer review leads to instances of undetected systemic audit problems. Deloitte and Touche, for example, gave unqualified opinion regarding the financial statements of Parmalat Company even after the fraud was discovered.
Lack of effective tertiary monitoring
In most cases, the credibility of the auditor is based on the reputation of the accounting and auditing firm. It is assumed that auditors from a good auditing firm are more competent than other auditors from firms without good reputation. This implies that tertiary monitoring is not emphasized in such big firms. The effectiveness of their audit services is not strictly monitored. Regardless of the auditing firm, an auditor is required to show a high degree of discipline in the auditing process. An auditor should minimize incidences of conflict of interest in carrying out an audit.
Auditors should not accept appointment where they suspect that their work may be comprised as a result of conflict of interest. Failure to maintain discipline may lead to cancellation of the practicing certificate by the public oversight accounting board. Accounting and auditing firms should also be formed using the correct procedure. The partners should have the necessary qualifications to carry out auditing and accounting services. In the case of Parmalat Company, there was lack of independent monitoring of the auditors. Hence, they were unable to detect errors and frauds in Parmalat’s annual financial statements
Lack of independence by the auditors and the board
Auditing is an independent practice. It involves an examination of financial statements of a public company. The financial statements should be prepared as per the accepted accounting and auditing principles. The financial statements prepared include the statement of financial position, statement of profit and loss account, cash flows statements and statement of changes in equity. Since auditing is an independent practice, auditors must be independent.
Independence is essential since it helps in expressing an independent opinion on whether the company’s annual financial statements reflect true and fair view financial position of the company. Financial statements are said to be true and fair if they contain all material information of a company and all the transactions have been disclosed. In addition, all the information should be provided to the auditor without bias. The company board of directors were also not independent. From the audit report, there is minimal evidence suggesting that independent checks and controls were carried out. Such controls include independent reviews of reconciliations and financial reporting.
Inadequate control system
It is evident from the audit report that there were no control measures for ensuring that transactions are posted in the correct ledger accounts. For example, managers were not recording the transactions in the required ledger. They only posted the transactions in the general ledger. Segregation of duties would have helped in helping to detect the errors and frauds. The managers were responsible for reviewing and signing the reconciliations and financial reports.There was lack of adequate control measures in recording of transactions. In addition, there was restricted information to the Chief Finance Officer.
Lack of validity checks, for example, had an impact on the Parmalat’s total debt. The actual balance of the total debts was different from the figure on the balance sheet. There was also a forgery document of €3.95 billion. The company prime minister appointed an investigation team to investigate on the fraud cases within the company. The team found out that there were nine insiders in the Parmalat board, one affiliated outsider and only three independent auditors. It was discovered that billions of Euros could not be accounted for in the company books of accounts. The fraud also led to the collapse of Enron, United States energy giant. It was also found that the company had no bank accounts at the Bank of America as indicated by the board. The primary auditors were Deloitte and Touche
HOW CHANGES IN THE REGULATION OF AUDITING; CORPORATE GOVERNANCE; AND AUDIT REPORTING CAN ASSIST IN PREVENTING SIMILAR SCANDALS
The changes will help in improving the auditing control environment. According to ISA 400, control environment can be defined as the overall attitude, awareness and management actions regarding the internal control systems.Changes in the corporate governance will help in increasing the effectiveness of the internal control systems and control procedures. An effective control environment will help in encouraging awareness among the management on the need for good internal controls. In addition, practises such as peer review will be enhanced by existence of an effective control environment. Segregation of duties, for example, is essential in minimizing misappropriation of cash. It also helps to avoid errors and frauds as a result of fraudulent collusion.
The changes will help in creating effective fraud risk assessment method. A company is considered to have a material weakness in situations where the risk assessment function is ineffective. It is vital for companies to implement appropriate programs and controls that will help in preventing, detecting and minimizing relevant errors and frauds. Areas such as revenue recognition, significant and unusual journal entries and complex accounting procedures require attention during risk and fraud risk assessment process. The role of fraud risk assessment should be carried out by every facet of the organisation. Carrying out thoroughevaluation of the organization is essential during internal audit process.
Changes in auditing regulation are also essential in increasing auditors’ liabilities. Sometimes, an auditor may fail to exercise sufficient care and skills in carrying out their duties. Auditors must be competent and honest. They have to carry out their responsibilities with reasonable care, skills and diligence. Shareholders and other investors will rely on the work of the auditors to make investment decisions. An investor who relies on the auditor’s report and incurs financial loss ought to be compensated. This is because the auditor was negligent in carrying out his or her responsibility. Corporate governance and changes in auditing standards will increase the auditor’s liabilities in situations where the auditor is negligent. For example, the auditor’s practising certificate may be cancelled. This will help in improving their level of competence in carrying out their responsibilities.
Auditors have a responsibility on information contained in a company’s annual report which do not relate the audited financial statements or the audit report. An auditor is required to evaluate whether such information will have any impact on the audit report issued. The information is also important since it helps in detecting any issues of material misstatements or inconsistency. The auditor will adjust the report accordingly in order to reflect the true financial position of the company.This will help to eliminate incidences of misleading audit reports. An auditor should request the company management to revise the financial statements so as to incorporate the information.
Corporate governance also requires the auditor to take into consideration post balance sheet events. These are those events which occur between the date the company balance sheet are prepared and the date the accounts are approved by the company Board of Directors.Such events may have an impact on the auditor’s report. A court case, for example, requires the company to make adequate provisions. The court case should also be disclosed in the report. Bankruptcy of a debtor and the sale of inventory are also issues that the auditor should take into consideration. Such events require the auditor to make appropriate changes so that the report can depict the correct company financial position. This will help in detection of errors and frauds in the annual financial statements.
The Public Company Accounting Oversight Board (PCAOB) helps to register public accounting and auditing firms which prepare audit reports for the shareholders. It is the duty of the board to ensure that the firms have qualified and competent staff. Also, they ensure that the accounting firms have enough resources to carry out their duties. This minimizes the incidences of over-relying on the client. This may lead to conflict of interest.
The board has to issue inspection reports after they have conducted auditing of public accounting firms. The board should inspect the public accounting firms. This ensures that the accounting firms are following the accounting and auditing standards set by the board. The staff should have the necessary qualifications. Inspection reports should be made public. It is not necessary to create awareness to the public of information regarding defects in the control system. The information may be made public if the firm does not rectify the control system within the next twelve months
International Accounting Standards Board. (2004). International accounting standards IAS 36, Impairment of assets, and IAS 38, Intangible assets. London: IASCF Publications Dept.
Barry J. Epstein, R. N. (2007). Wiley GAAP 2008: Interpretation and Application of Generally Accepted Accounting Principles. New York: John Wiley & Sons.
Dauber, N. A. (2009). Wiley The Complete Guide to Auditing Standards, and Other Professional Standards for Accountants 2009. New York: John Wiley & Sons.
Deloitte. (2005). Optimizing the Role of Internal Audit in the Sarbanes-Oxley Era. Deloitte , 8. Financial Reporting Council (FRC). (October 2012). International Standard on Auditing (UK and Ireland) 720. Standard: Auditing and Assurance , 5-19.
Gary John Previts, P. J. (2011). Global History of Accounting, Financial Reporting and Public. Bingley : Emerald Group Publishing.
Gibson, C. H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. South Melbourne: Cengage Learning.
Kirk, R. (2005). International Financial Reporting Standards in Depth, Volume 1. Amsterdam: Elsevier.
Michael G. Alles, A. K. (2004). Restoring auditor credibility: tertiary monitoring and logging of continuous assurance systems. International Journal Of Accounting Information Systems 5 , 183-202.
Morley Fund Management. (June 2005). Undermining the Statutory Audit: The damaging effects of adopting IFAC-IAASB standards on auditing (ISAs). Investment Management Association , 7.
Penman, S. H. (2007). Financial Reporting Quality. Accounting and Business Research: International Accounting Policy Forum , 33-44.
Ramos, M. J. (2006). Wiley Practitioner's Guide to GAAS 2006: Covering all SASs, SSAEs, SSARSs, and Interpretations. New York: John Wiley & Sons.
Steinhoff, J. C. (2001). Government Auditing Standards 2002 Revision: Exposure Draft. New York: DIANE Publishing.
Whittington, G. (2010). Measurement in Financial Reporting. A Journal of Accounting, Finance and Business Studies , 104-109.