Parmalat Accounting Scandal Essay

SummaryAfter eluding financial analysts and investors for a long time, Parmalat went ruin later in December, 2003 and many of their board of directors drop been arrested since then. Here is a brief summary of the events In the late 1980s, Parmalats financial short letter was poor due to investment in side businesses. i.e. TV network, Parmatur, football game teams (Palmeiras, Parma, etc). Cash siphoning through these companies was estimated to be total of 10 Bn. In 1990, Parmalat went customary which enabled them to tap into the capital markets. Early 1990s, the company began to acquire dairy producers roughly the world in order to try to hide the growing debt.Parmalat entered into a series of vex issuances and securitization of receivables to generate cash. A series of other dishonorable news report practices occurred during the succeeding(a) years. In December 2003, Parmalat was not able to nock a U$ 150MM bond payment and raised the attention of the perfect market. Whe n the fraud was brought up, Calisto Tanzi (Parmalat founder) and Fausto Tonna (CFO) was arrested along with another 10 individuals. Grant Thornton and Deloitte & call forth were Parmalats explanationing firms during the last 2 decades. Partners of both firms were charged for dishonest activity.Case analysis From the analysis we made, there are several items that plenty be appointed as accounting principle violation A) enlargement of Assets Assets Selling Parmalat sold firms to private entities and individuals to re-buy it later in a formulate operation, as the money came from other offshore entities just to create liquidness in the books thanks to that, they could keep issuing bonds to cover their debts Accountable Receivables quotation Double billing the Italian supermarkets and other retail customers Fake lingo accounts false document have been created to prove the existence of 3,9 Bn cash at Bank of America. Again, with more liquidity, more easily got the loansB) Ove rstatement of revenues Revenue experience False income sales through its offshore companiesC) Understatement of liabilities Debt eliminating Parmalat reduced approximately Euro 3.3 Bn of debt. Misclassification of liabilities describing sales of receivables as non-recourse, when the company maintained obligation to ensure payment.Proper accounting practices that should have been used A) Assets The firm recognizes revenue when the transaction meets both of the following conditions 1. Completion of the earnings process the seller has done all (or approximately all) that is promised to do for the customer. That is, the seller has delivered all (or nearly all) of the goods and services it has agreed to stand 2. Receipt of assets from the customer The seller has received cash or many other asset that it can convert to cash, for example, by collecting an account receivable Accountable receivables recognition (billing twice)In this case, Parmalat generated double accounts receivable for the corresponding operation billing both, their distributors and the final customer. The revenue from the final customers was recognized on the books, but the billing for the distributors were considered as transfer and accounted for credit owed. Revenue recognition What happened here is that the seller never done what was written in the books, as the operation never existed and customer never received the goods.B) LiabilitiesDebt Eliminating Parmalat eliminated paid hatful debt by a series of capital market transactions, mainly bond issuances and sale of receivables. These finance transactions were made possible by overstating their assets. Misclassification of liabilities Parmalat misclassified the financing transaction of selling their receivables. Although, Parmalat sold its receivables (assets) to financial institutions/investors, they were not a honest non-recourse sale and Parmalat maintained obligation to ensure that the receivables were ultimately paid, therefore Pa rmalat should have classified this financing as a liability.