December 23, 2003

Where Did the Money Go?

Yes. But where did the $11 billion go? Who has it now?

Italian Officials Say They Suspect $11 Billion Ruse at Parmalat: Parmalat, the Italian dairy and food giant, engaged in a tangled scheme involving dozens of offshore front companies to invent assets to offset perhaps as much as $11 billion in liabilities over more than a decade, Italian investigators said on Tuesday.... The crisis at Parmalat, carrying echoes of the byzantine partnerships that contributed to the collapse of Enron in the United States, dwarfs all other European accounting scandals in recent years and raises questions about the ability of European regulators to oversee global companies that are increasingly financially sophisticated...

Now that last sentence is simply wrong. It's not the European regulators who have failed, it's--once again--the auditors: Grant Thornton, and maybe Deloitte and Touche.

For example:

...In March, Parmalat sent Grant Thornton documents on Bank of America letterheads confirming the accounts. Bank of America subsequently declared the letters forgeries. People close to the investigation said the documents, including a letter supposedly written on March 6 and signed by Agnes Belgrave, a Bank of America employee in New York, had been forged using scanners, probably by Parmalat finance officers, although they did not identify them. The letter, on a Bank of America letterhead, states that at the time, Bonlat had 4.2 billion euros in its account at the bank. Bank of America said on Tuesday that it was cooperating with investigators and that it had filed a criminal complaint with investigating magistrates. A spokeswoman said the complaint related to possible forgery...

Parmalat should not be sending auditors Bank of America documents. Bank of America needs to be sending the auditors Bank of America documents--or at the very least a document sent from Parmalat claiming $4 billion in assets needs to be checked by a phone call to the document's purported author.

Posted by DeLong at December 23, 2003 09:08 PM | TrackBack

Comments

Statement of Auditing Standards #67 "The Confirmation Process" says "During the performance of confirmation procedures, the auditor should maintain control over the confirmation requests and responses. Maintaining control means establishing direct communication between the intended recipient and the auditor to minimize the possibility that the results will be biased because of interception and alteration of the confirmation requests or responses."

Grant Thornton -- at least its Italian member firm -- appears headed for serious trouble. Parmalat's Nov. 11 description of its Epicurum "investment"/currency swap at
http://www.parmalat.net/en/doc/2003.11.11%20en.pdf refers to "an expert appraisal carried out by the auditing firm, Grant Thornton, Spa" as the basis for booking a large and apparently fictitious profit which Deloitte questioned in its midyear review. http://www.parmalat.net/en/doc/Auditor_s_Report_first_half_2003.pdf
(Italy's mandatory auditor rotation rules resulted in D&T replacing GT as the primary auditor in 1999, but GT continued to audit Parmalat's offshore finance entities.)

Posted by: Gwailo on December 24, 2003 02:51 AM

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An $11 bn. fraud ! Many investors and banks must have lost serious money, but I am surprised there are no (or not yet) ramifications of this scandal in the financial markets (apart from Italy). The financial markets were rattled when Enron's frauds were exposed and this Parmalat scandal seems to be even bigger, in the terms of money involved:
$ 11,000,000,000.00 !

Posted by: Nescio on December 24, 2003 06:39 AM

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There are no "European regulators". From the point of view of corporate governance, European countries are very different from one another.
Talking about European corporate governance, is a bit like talking about "European food". Depending on the country, you can find the best or the worst.

Posted by: amusedfrog on December 24, 2003 06:48 AM

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"Parmalat should not be sending auditors Bank of America documents. Bank of America needs to be sending the auditors Bank of America documents".
You are quite right, this is very strange.

Years ago I worked for a now defunct audit firm (initials AA). The standard operating procedure was for the auditors to write directly to the banks, debtors, customers and suppliers to get a confirmation of what was in the book of the audited company.

It is difficult to believe that the auditors accepted that Parmalat possessed 4 billions in a bank account, just on the basis of a piece of paper provided by Parmalat.

Posted by: amusedfrog on December 24, 2003 06:57 AM

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Nescio, maybe the world financial markets are used to this by now. Enron was supposedly down to #3
(after WorldComm and somebody else whose name I forget). The way that things are going, Enron might not be on the top ten list by mid-decade.


Posted by: Barry on December 24, 2003 07:01 AM

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To repeat the obvious: a system under which companies audit themselves, using hired hands they themselves pay, is ridiculous on its face.

Posted by: David Lloyd-Jones on December 24, 2003 06:14 PM

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Get out.


Posted by: Nickname on January 7, 2004 07:38 AM

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Get out.


Posted by: Nickname on January 7, 2004 07:40 AM

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Get out.


Posted by: Nickname on January 7, 2004 07:42 AM

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Get out.


Posted by: Nickname on January 7, 2004 07:46 AM

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Get out.


Posted by: Nickname on January 7, 2004 08:15 AM

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