Parmalat – College Essay Essay
1. Review the facts in the case, especially the charges in the complaint, and evaluate the auditors’ compliance with GAAS. Do you think the auditor did all they could to detect the fraud? Evaluate whether auditors exercised due care and the level of professional skepticism to be expected in an audit the size of Parmalat. Clearly, auditors failed to do the due diligence, thereby indirectly contributing to the failure of Parmalat.
Italian law requires both listed and unlisted companies to have a board of statutory auditors as well as external auditors and also requires the reselection of auditors by the board of directors every three years and the rotation of auditors after three consecutive selections. A big size company, such like Parmalt, need independent auditor. What is independent auditor? The role of an independent auditor is crucial in protecting investors from dishonest management and has to be indifferent to the board.
Meanwhile, the auditor should not be a friend of the company and should work completely independently. Parmalt’s internal auditors lack of the independent. They usually controlled by Tanzi family. The auditor also lack of professional prudence of auditing. They provide the financial reports and income statement is irresponsibility. Based on this situation, suggest let the internal control responsible for administering authority and company board, when find big problems report to them at once. Auditors must be independent and have the corresponding knowledge, such some financial experts.
Audit committee must pay more attention on evaluation enterprise risk assessment and care about CEO and CFO’s job investigation. Strict auditors’ rotated control is quite essential. Clear the function of an auditor. The auditor must responsible for merging accounting report forms.
2. Refer to the fraud triangle in Chapter 5. Categorize the various activities and decisions by Parmalat and its top management into one of the three elements of the triangle. Three conditions are present when fraud occurs: a pressure, an opportunity, and a rationalization. Pressure:
In the middle of 90, the Parmalat Company began a massive expansion in the world. This across region expansion requires significant financial support. After the company’s productions diversification, Tanzi began extent its industry in a wide range such like tourism industry. Both of these needs a large amount of money makes Parmalat’s managers eager to get financial support. Based on this situation, when management got money from public, they transfer the money from Parmalat Company to their own personal business—this is the easiest way to get money.
So the company’s management fake the financial reports, to create “the surface of prosperity” to deceive investor. This is the factor of pressure. Opportunity: Parmalat’s board never reported any irregularities or problems despite receiving complaints because of the influence of the Tanzi family. Parmalat is a family company. Family group occupies absolute amount of shares in the enterprise. Meanwhile, Italian securities regulator’s regulation is not enough which cannot be effectively restricted controlling shareholders.
These made Tanzi easy to transfer money and assets to its personal business and manipulate the financial reports. Some famous international investment bank just focus on how to get commission charges (Banks and financial institutions were so busy in making money through their dealings with Parmalat without considering longer-term consequences. ). So they open an easy way without establish any effective supervision. Actually banks need responsible for Parmalat’s cheating behavior. Rationalization: Management use all excuses are self-deceiving want to rationalizing their behavior.
3. Based on the information in the case, classify the improper transactions engaged in by Parmalat into one of the seven financial shenanigans identified by Schilit in Chapter. Provide a brief explanation why you selected that group and how Parmalat’s accounting violates U. S. GAAP. Recording Bogus Revenue: Typically, bogus revenue transactions lead to fictitious revenue. Parmalat violated U. S. GAAP, through. Incorrect accounting for SPEs including failure to consolidate, selective use of the equity method of accounting, and failure to eliminate the impact of transactions among entities. Failure to provide complete disclosure ) Unfair financial reporting It is now apparent that Parmalat viewed GAAP as rules rather than principles 2) sought to interpret GAAP in the most aggressive manner, did not consider the fairness principle, one of the most fundamental of GAAP, and 4) ignored the legal precedent that emphasizes fairness over detailed rules, as well as the accounting concept that emphasizes economic substance over legal form.
4. The consent agreement with the SEC calls for a variety of corporate governance initiatives to be undertaken by Parmalat.
Explain the purpose of these requirements and how they should strengthen the corporate governance systems at Parmalat. Parmalat is the failure in the corporate governance. Such failures might result from the failure in the current codes on the corporate governance. Corporate governance is a broad theory concerned with the alignment of management and shareholder interest. A system of corporate governance is needed to ensure that the businesses are running properly for the realization of the organizational goals.
Company needs to be based on guidelines and constraints in achieving its objective such as to maximize wealth of it shareholders and with regard to other group that have interest in company. The character of the corporate governance is the relationship between management of the company which include directors, investors and other interest shareholders. Communication effectively in these sections is the most important part for good corporate governance. Parmalat was the latest issue and had recorded the largest accounting calamity in the world, so the financial reporting and auditing is also important for corporate governance.
The company needs to produce transparent financial report and concise describe what will affect earnings and revenue. Of course, investors have authority to check the relevant information which is truly showed. The company’s annual report should provide efficient information. Audit committee should pay more attention on the corporate governance. The financial report, internal control, internal audit function also need to regulated by audit committee. Auditors’ function must be clearly and auditors’ independent is required.