The 2003 collapse of the Parmalat Group shocked Italy. The sheer scale of the fraud – still Europe’s largest bankruptcy – highlighted the urgent need for better accounting controls.
Stefania Chiaruttini, founder and equity partner of accountancy firm Studio Chiaruttini & Associates, explains how she used her accountancy education and experience to help the Prosecutor of the Milan Court uncover the extent of the fraud and prevent future cases.
Set the scene, what was your role in uncovering the Parmalat Group’s fraud?
It was clear that Parmalat’s senior management had used a range of unethical techniques to perpetrate fraud on a massive scale, including creating fake sales and assets to bolster the balance sheet. They had also colluded with auditors and bankers to conceal the true financial position of the company – it had €15 billion in off-balance sheet debt. My task was to discover how the Group was able to sustain these fraudulent activities for so long and to help avoid similar cases in the future.
The Prosecutor of the Milan Court asked me to identify all the false information reported in the Parmalat Group financial statements. This involved auditing the balance sheets during the 13 years leading up to the default, to ascertain the true position of the Group and how it compared to the declarations in the annual financial statements. I focused on identifying the true level of debt, the gross operating margin and the liquidity. I also assessed how accurately the auditors had carried out their work.
In total, I worked on this audit full time for five months. Along with a team of forensic accountancy experts, I was able to gather information from external sources to compare with the published financial statements. By using these external sources, I was able to reveal the inconsistencies between the published and real positions.
How did your work help to prevent future fraud?
Our work demonstrated that the controls that existed were simply not effective in detecting when the financial statements were being artificially enhanced. It was clear that there needed to be a greater emphasis on the genuine substance of operations on contracts, rather than their legal structure, something that our forensic accounting approach was able to provide.
Ultimately – in part due to our work – the regulatory authorities have increased their controls and recognition of the value of forensic accounting has grown. To date, there has been no repeat of this type of fraud.