In late December 2003, Claudio Pessina, a financial accountant for the large Italian food conglomerate Parmalat, was given an unusual order by his immediate superior, the company’s chief accounting officer (CAO). Luciano Del Soldato told Pessina to destroy his laptop computer.1 When Pessina reacted with surprise to the request, an animated Del Soldato repeated the order, telling Pessina that he wanted him to use a large hammer to pound the computer into hundreds of small pieces.

A few days later, on Christmas Eve 2003, Parmalat filed for bankruptcy. New Year’s Eve proved to be even more unpleasant for Del Soldato and seven other Parmalat executives.

Italian law enforcement authorities arrested the executives and charged each of them with being involved in what would prove to be the largest accounting fraud in European history. At the time, Parmalat accounted for 1.5 percent of Italy’s annual gross national product (GNP), which meant that the company had a much larger impact on the Italian economy than either Enron or WorldCom had on the U.S. economy before those two companies collapsed in spectacular fashion a few years earlier.

Parmalat’s financial statements had grossly misrepresented the company’s financial condition and operating results for more than 15 years. Subsequent investigations revealed that Parmalat had overstated its assets by more than \($16\) billion and understated its liabilities by more than \($10\) billion. Included in the company’s fictitious assets was nearly \($5\) billion of cash supposedly on deposit with Bank of America.

Del Soldato had ordered Pessina to destroy his computer because it contained files that documented many of the important details of the fraud, including a mysterious intercompany account, Account 999. Investigators would discover that Account 999 had been used as a virtual garbage dump by the company’s accounting staff for the billions of dollars of fictitious assets that accumulated on Parmalat’s balance sheet over the course of the long-running fraud.

Fausto Tonna, Parmalat’s former chief financial officer (CFO) and a close friend and confidant of the company’s founder, was one of the masterminds of the massive fraud. Tonna was less than contrite after being arrested by members of Italy’s federal police force, the carabinieri. While being escorted by the police to his arraignment, Tonna was peppered with questions by a frenzied throng of journalists. On the steps of the courthouse, Tonna paused and addressed his antagonists in an angry and deliberate tone. “I wish you and your families a slow and painful death.”2

“The Coca-Cola of Milk”

Collecchio is a picturesque village strategically located in northwestern Italy. Nearby is Milan, the world’s fashion capital; Verona, the setting that Shakespeare chose for Romeo and Juliet; “Fat Bologna,” the gastronomic capital of Italy; and Cinque Terre, a string of five quaint fishing villages, which has become one of Europe’s favorite tourist destinations. After World War II decimated Italy’s economy, Melchiorre Tanzi, a longtime resident of Collecchio, supported his family by peddling preserved meats door to door with the help of Calisto, his oldest son, who was born in 1938. When he graduated from the local liceo or high school, Calisto left Collecchio to earn a university degree. Although he enjoyed working with his father, he had bigger dreams than being a small-town merchant. Calisto planned to become a professional accountant and work for a major Italian corporation.........

Questions:-
1. Identify key factors or circumstances that complicate an independent audit of a multinational company.
2. What audit procedures would likely have been the most effective for detecting Parmalat’s fraudulent double-billing scheme? Defend your choices.

3. Identify the fraud risk factors that were present during the Parmalat audits.
Rank order these risk factors from the most important to the least important.
Be prepared to defend your rank ordering.
4. According to generally accepted auditing standards (GAAS), how should the responsibility for performing “shared audits” be allocated to the accounting firms involved in such engagements?
5. Do you believe that the individual national practice units of international accounting firms’ global networks should face joint and several liability? Defend your answer.
6. Cultural norms and nuances affect the operations of large companies worldwide. Identify examples of distinctive cultural norms and nuances specific to three countries. Explain how these cultural traits likely impact the independent audits of companies in each of those countries.
7. Identify the advantages and disadvantages of mandatory audit firm rotation.
What, if any, auditor rotation rules are in effect in the United States?
8. Both Deloitte and Grant Thornton were named as defendants in a class-action lawsuit filed by Parmalat’s bondholders. Deloitte agreed to pay \($149\) million to settle the lawsuit, while Grant Thornton chose to contest the lawsuit and was ultimately dismissed as a defendant. Identify the factors that accounting firms should consider in deciding how to deal with a pending lawsuit.