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UK: Cooking the Books at Parmalat

by Fred KapnerFinancial Times
April 12th, 2004

As Parmalat executives last December took a hammer to a computer at headquarters and crudely attempted to destroy evidence, one of the most damning files under attack was "Account 999".

The file survived. A print-out of Account 999 and its Euros 8,056,131,103.09 debit is now one of many bizarre centrepieces for charges being prepared against former Parmalat managers and Deloitte Italy, the bankrupt dairy group's primary auditor.

The document also is key to reconstructing how Calisto Tanzi, Parmalat's founder, hid years of mounting losses until his edifice collapsed last December under Euros 14.5bn (Dollars 17bn) of debt and no cash.

A report prepared for prosecutors by a special consultant, obtained by the Financial Times, describes Account 999 and dozens of other instances when investigators believe Deloitte's Italian office, in particular, failed to apply basic accounting principles and verify "irregular" and "suspect" accounting entries.

The report details how Deloitte Italy, which co-ordinated the audit of Parmalat's worldwide operations, repeatedly ignored and buried evidence of accounting irregularities uncovered by sister offices in Brazil, Argentina, Mexico, Portugal, the US and Canada.

Other people familiar with the group describe similar instances involving other countries.

Deloitte Italy and Parmalat's top executives also appear to have successfully lobbied Deloitte's US global headquarters to intervene in Brazil and remove an auditor there who had raised too many embarrassing questions, three people familiar with the incident said.

The episodes, accounting industry experts say, highlight the need for better internal controls at some auditing firms and the ease with which large clients can bully auditors hungry for fees.

Deloitte began auditing Parmalat in 2000, reviewing consolidated accounts for 1999. As such, it arrived at least 10 years after Parmalat executives began to cook the books and create "one of the largest and most brazen corporate financial frauds in history", as the US Securities and Exchange Commission stated in a recent lawsuit.

Account 999, however, was an Euros 8bn clue that something was terribly wrong.

Gianfranco Bocchi, a former Parmalat accountant, told investigators the account, essentially a computer document, was shown to Deloitte Italy auditors. The account, he said, was a "trash bin" for all the faked revenues, assets and profits that Parmalat had accumulated over the years. To cover up the fake transactions, the entries were transformed into intercompany loans and credits.

Companies regularly compile a document listing intercompany transactions among subsidiaries. On a consolidated basis, they cancel each other out - one unit's debt is another's credit.

A company the size and complexity of Parmalat normally could have an intercompany imbalance at year-end of between Euros 200,000 to Euros 400,000 at most, due to currency fluctuations or one or two unusual factors, one accountant familiar with Parmalat said.

The first thing an auditor does to prepare consolidated accounts is to balance out intercompany transactions, and Deloitte "missed it by Euros 8bn", he noted.

Deloitte declined to comment on details of the report. The accounting firm reiterated earlier statements that it believed "Deloitte Italy behaved properly and in accordance with the national standards in force at the time". It also said the "proper place for the full facts to emerge is in the courts and not in the press".

Deloitte Italy essentially controlled the audit reports for Parmalat's non-Italian units. Often when a non-Italian auditor worried about a Parmalat subsidiary's balance sheet, Deloitte Italy would get Parmalat's top executives to write guarantees pledging that the Italian parent company or one of its financial subsidiaries could cover potential losses. <>

Parmalat executives themselves intervened in more heavy-handed ways. In Argentina, when Deloitte partners there raised doubts in 2000 about several issues, Fausto Tonna, the group's former chief financial officer, threatened to fire Deloitte Argentina and called their requests "offensive and ridiculous".

Mr Tanzi then wrote a letter to Parmalat Argentina guaranteeing financing from the Italian parent should it need it, and the issue disappeared. Deloitte Argentina continued to work for Parmalat.

A partner at another accounting firm said: "If a chief executive vouches for a credit, the auditor isn't going to probe much more . .. But the executive very rarely lies."

In Brazil, one of Deloitte's auditors raised numerous concerns in 2001 and 2002 about the growing intercompany credit that made up the assets of Parmalat Participacoes do Brasil, the group's largest foreign subsidiary.

By spring 2002, Wanderley Olivetti, the auditor, asked for a "comfort letter", a mild form of guarantee, for Dollars 554m in credits owed to PPdB by Bonlat, a Cayman Islands financial subsidiary of Parmalat. It is not clear whether a comfort letter was ever sent, but PPdB's 2001 audit contains only a mild qualification from Deloitte on some issues, as does that of 2002.

Mr Olivetti did not return phone calls.

Similar accounting discrepancies were uncovered by local Deloitte offices in Mexico, Costa Rica, Nicaragua, Venezuela, Ecuador, the US, Canada, and Portugal, the prosecutors' report and other people familiar with the case said. A former Parmalat employee described the acquisition of one Central American company by Parmalat for Dollars 25m: "The seller got Dollars 5m. The rest went to politicians, middlemen, Parmalat executives. But you had to account for it as Dollars 25m even though it was worth Dollars 5m."

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