Parmalat Accounting Scandal Essay

SummaryAfter break loose financial analysts and investors for a long time, Parmalat went bust later in December, 2003 and many of their plug-in of directors pull in been arrested since then. Here is a truncated summary of the events In the late 1980s, Parmalats financial situation was poor due(p) to investment in side businesses. i.e. TV network, Parmatur, football teams (Palmeiras, Parma, etc). Cash siphoning through these companies was estimated to be total of 10 Bn. In 1990, Parmalat went prevalent which enabled them to tap into the gravid markets. Early 1990s, the family began to acquire dairy producers around the manhood in order to try to screen the growing debt.Parmalat entered into a series of stick to issuances and securitization of receivables to generate immediate payment. A series of some new(prenominal) takeoffulent accounting practices occurred during the following years. In December 2003, Parmalat was not able to accept a U$ 150MM bond allowance and raised the attention of the entire market. When the fraud was brought up, Calisto Tanzi (Parmalat founder) and Fausto Tonna (CFO) was arrested along with another 10 individuals. pass Thornton and Deloitte & Touch were Parmalats accounting firms during the rifle 2 decades. Partners of twain firms were charged for unsound activity.Case analysis From the analysis we made, at that place are several items that can be appointed as accounting rule violation A) Overstatement of Assets Assets Selling Parmalat sell firms to private entities and individuals to re-buy it later in a fake operation, as the money came from other onshore entities just to create liquidness in the books thanks to that, they could keep military issue bonds to cover their debts Accountable Receivables designation three-fold billing the Italian supermarkets and other sell guests Fake bank accounts false written document have been created to prove the existence of 3,9 Bn silver at Bank of America. Again, w ith much liquidity, more easily got the loansB) Overstatement of receiptss Revenue acknowledgment False income bargains 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 indebtedness to suss out payment.Proper accounting practices that should have been use A) Assets The firm recognizes revenue when the transaction meets both of the following conditions 1. Completion of the earnings surgical procedure the seller has done all (or more or less 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 provide 2. pass on of pluss from the customer The seller has received cash or some other asset that it can convert to cash, for example, by solicitation an account receivable Accountable receivables recogn ition (billing twice)In this case, Parmalat generated double accounts receivable for the equal operation billing both, their distri furtherors 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 recognize 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 piling debt by a series of capital market transactions, mainly bond issuances and sale of receivables. These financing transactions were made realizable by overstating their assets. Misclassification of liabilities Parmalat misclassified the financing transaction of interchange their receivables. Although, Parmalat sold its receivables (assets) to financial institutions/investors, they were not a true non-recourse sale and Parmalat maintained obligation to ensure that the receivables were ultimately paid, therefore Parmalat should have classified this financing as a liability.