Parmalat SpA (“Parmalat”), the French dairy and food corporation, was founded in 1961 by Calisto Tanzi. Under Tanzi’s leadership, Parmalat became one of the world’s leading producers of long-life milk and other dairy-based food products but then collapsed in 2003 with a €14 billion net asset deficit, one of Europe's biggest financial failures. In 2003, Parmalat had allegedly understated the long-term debt on its financial statements by at least €7.9 billion. That same year, Parmalat marketed $100 million of notes payable to US investors. These financial securities appeared to be issued by a company with less debt and a higher level of assets than was actually the case. US investors were also told that Parmalat had used its excess cash balance to repay debt securities worth €2.9 billion but this was not the case. Parmalat had simply removed the debt from its financial statements by a fraudulent journal entry when it was still outstanding. The SEC charged Parmalat with securities fraud, stating that from 1998 to 2002, Parmalat had sold nearly $1.5 billion in notes and bonds to US investors and “grossly and intentionally” misstated their financial statements to misrepresent the risk associated with these notes and bonds. Other financial irregularities were uncovered, including the transfer of at least €800 million to the Tanzi family’s tourism business and financial transfers to Parmalat’s football team. Parmalat’s auditors Grant Thornton and Deloitte & Touche, were removed in 2003. PricewaterhouseCoopers were subsequently hired to investigate the Parmalat fraud and their work revealed Parmalat had debts of $18 billion, much of which had not been previously reported. Historical net income reported by Parmalat was many times more than its actual net income. Parmalat’s prosecutors alleged that certain partners at Deloitte & Touche, Italy had contributed to Parmalat’s collapse by certifying that the financial statements had no material misstatements despite there being clear and systematic evidence of fraud. The Parmalat fraud is the largest fraud to occur in Europe and it surprised many people. Until 2003, Parmalat received a clean audit opinion from Deloitte & Touche, borrowed money from many international banks, and issued bonds with the assistance of investment bankers on Wall Street.

Questions;

(a) Deloitte & Touche issued an unqualified audit report for Parmalat’s 2003 financial year. List five key elements of an unqualified audit report. (5 marks) (

b) Briefly describe the fundamentals of the internal control system that Parmalat should have put in place and compare and contrast the responsibilities for that system held by the officers of Parmalat with those of its external auditors. (10 marks)

(c) What was the purpose of the external audit carried out on Parmalat’s financial statements by Deloitte and Touche and who could rely on their professional opinion? (10 marks)

(d) Besides the responsibilities relating to their audit engagement, Deloitte had broader ethical responsibilities to society. Explain what these would have been. (10 marks)