The Role of the Auditors with Respect to Parmalat Scandal - Essay Example

?Analysis of Parmalat Scandal Introduction The failures to identify the reporting on the misleading of financial information have undermined the economic value of audit (CGR, 2013). The significant changes in the internal auditing functional procedure after the Enron and WorldCom disasters was due to peer pressure by media and the focus of the legislative functions (NAB, 2011). Parmalat had changed its external auditor from Grant Thornton to Deloitte Touche in 1999. However, the Italian law states that changes within the audit firms has to occur only in a gap of every nine years and the previous auditor can only be consulted for auditing concerns related to the firm (Stoltenberg, Dey and Lys, 2008). This was one of the prime reasons which had brought the scandal under limelight. In the year 2003, Parmalat was severely penalized for trying to raise 300 million in the form of bonds (Word Socialist, 2004). The author of the study will highlight the impact of the integrity in the system of corporate accountability process, role of the auditors with respect to Parmalat scandal. The study will also highlight the importance of corporate governance mechanism related to Parmalat. The credibility of the audit reporting, functions and regulations will also be discussed with respect to the auditing procedure carried out by Deloitte & Touche in Parmalat. Finally, the study will conclude highlighting the changes in the critical evaluation of changes in auditing, corporate governance regulations in prevention of scandals. Integrity in the System of Corporate Accountability The corporate accounting system encompasses the traditional accounting and also the social reporting method. The social reporting concepts are supposed to revolve around environmental and also the social aspects of the assets and liabilities reporting methods. It is concerned with the benefits and cost associated with the issues and the verification, assurance provided by the auditors (Rao, Tilt and Lester, 2012). It encompasses various issues which revolve around the interactions and the inclusion of elements like ethics, corporate governance, social and environmental accounting, philanthropy activities (Pollock, 2011). The development of social corporate accounting encompasses the formulation of accounting systems as per the guidelines provided by the Global Reporting Initiative (GRI) to provide accuracy in the global and environmental accounting. Role of Auditors The role of internal auditors of the company identifies the errors and checks whether the measures undertaken by the management are in compliance with the norms and regulations. The duty of internal auditor is to check of the transparency of accounting system and also provide advice based on the conducted auditing function (National Fraud Authority, n.d). One of the prime objectives of the auditor is to provide the stakeholders and shareholders the key assurance that risk management activities are carried out effectively. The auditor’s incompetence will be observed when he/she would be able to uncover the misappropriations in the accounting systems and also the preparation of the timely accounting reports, risk management system and various other activities. They evaluate the accounting activities and provide certain reasonable assurance that enables the accomplishment of goals and objectives of the organization (Ferrarini and Giudici, 2005). Accurate and transparent auditing function can also necessitate the entire financial system and help in the removal of accounting discrepancies within the systems (Caraballo, Cheerla and Jafari, 2010). The management of the company is unaware that inaccurate auditing procedure leads to the complexities within the accounting system of the organization (George, 2011). In the context of Parmalat, the internal auditors were not only able to perform accurate auditing, detection of error on the methods of the system but also had involved itself in the creation of the forgery of accounts (Action Fraud, 2013).This was one of the prime reasons which had brought the scandal under limelight. In the year 2003, Parmalat was severely penalized for trying to raise 300 million in the form of bonds (Word Socialist, 2004). Hence, this incident had increased the chances of scrutiny by the investors as the company was already indebted and capitalized heavily (Taylor et al., 2005). This was one of the first signs of the crisis that had raised suspicion among the investors and market analysts. Issues which undermine the credibility of audit reports A major part of the corporate governance system is the internal auditing process of the company. This is because it adds value to the entire accounting process and helps in the continuous and regular monitoring of the environment within the company to detect the fraud in the entire accounting system. Majority of the corporate failures within the accounting system of the organization has occurred to the misappropriate functioning of the auditors and their fraudulent activities. Lack of strong internal control system helps the management of the company to accomplish the goals and objectives. The wrong and inaccurate information by the auditors leads to the incorrect managerial decision making. The weakening of the capital structure of the company has led to the increase in the corporate risk exposure and inaccurate financial reporting. In this context, the exposure of the alleged activities carried out by the company was detected when the company changed its long term auditor Grant Thornton to Deloitte Touche and when the son of the CEO of the company, Stefano had met the executive of the Blackstone Group in New York for the selling of 51 percent stake of the company (Word Socialist, 2004).During the meeting that took place between Stefano Tanzi and the top executive between Blackstone, Stefano had agreed that the company did not posses any liquid assets and had cash in hand worth 3 billion Euros which was listed in the annual report of the company. The poor auditing function conducted by Grand Thornton signified that the root cause of the poor managerial decision making had stemmed out due to audit failure which further led to accounting discrepancies (Word Socialist, 2004) Critical Evaluation of Changes in Auditing, Corporate Governance Regulations in Prevention of Scandals This act helped in making certain modifications in corporate governance charter and financial reporting for the public listed companies and also enhancing the entire focus on the internal control procedure (Paton, Juleff and Schachler, 2007). The newly modified rule and regulations acted as a guide for better focus in internal control procedure (Carcello, Hermanson and Raghunandan, 2005).This would help in accurate and proper evaluation of the internal control procedure activities and also for the improvement in the entire accounting procedure activities (Pollock, 2011). With the introduction to the above mentioned acts and several other regulations there was considerable improvement in the accounting procedure and financial reporting during this tenure (OECD, 2004a). This enactment focused more on the improvement in the internal audit, reporting and quality measures and also the entire auditing structure (Rao, Tilt and Lester, 2012). The introduction of various regulations and enactments would lead to the proper allocation of the budget for implementation of accurate auditing procedure and also on the removal of variations in the accounting procedures and financial reporting (OECD, 2004b). The introduction of several governmental regulations and enactments would lead in the complete change in the entire financial system. This change would lead to transparent auditing procedure and would be based on certain factors like consideration on selection of auditors, design of auditing procedure, structure and also on the number of staff of auditors (Heinrich, 2005). The considerable changes in the corporate governance methods and mechanisms would lay emphasis on the functionality of the board of directors (Clarke, 2007).The government should lay emphasis on introducing certain policies which would help in the enhancement of the structure of board committee, reliability of internal control, relationship with stakeholders etc (Cohen, Hermanson and Raghunandan, 2005). The Securities and Exchange Commission (SEC) should establish certain rules and regulations for the preparation as well as implementation of accurate financial reporting. The implementation of the changes would be time consuming and costly method and would almost resemble the hyper capitalism effect (Dunphy, Benn and Griffiths, 2003). The stock exchange regulators of different countries should focus on the establishment of certain guidelines which would lead to smooth facilitation in the stock exchange mechanism (Enomoto, Kimura and Yamaguchi, 2013). The focus of these policies would be the removal of aberrations associated with the accountings system however, ineffective implementation would have miniscule effect in the detection of errors in the accounting process (EOG, 2013). The rules and regulations related to corporate governance method affect the stock exchange activities like regulation of sale of securities, securities being offered for sale and also other investment decisions. The recent enactments can help in the prohibition of accounting discrepancies and the irregular sale of securities. The rules and regulations will lay emphasis on the two basic factors; inaccurate material information to investors and prevention of misrepresentation, fraud in sale of securities and deceit. Corporate Governance A good corporate governance system (Stoltenberg and Lys, 2008) will automatically lead to the sorting of the strategic and financial priorities of an organizations which can enhance the corporate efficiency and increase the investors’ confidence (Taylor et al., 2005). The accounting associations should lay emphasis on the establishment of rules and regulations which help in the optimal quality regulation of auditing under the financial information that is certified by the auditors which could lead to the prevention of the loss of informational efficiency (Kim, 2011)misallocation of investment funds and the minimum imposing of the regulation of the auditing standard (NAB, 2010).This would lead to the transparency in the entire financial system and also improvement in the existing systems. The modification in the baseline model would help in the removal of complexities of the problems in the existing accounting systems, removal of moral hard problems in the organization and also to extract minimal organizational or individual benefits. The main objectives of the rules and regulations in the corporate governance system would be the empowerment of investors and disclosure of material accounting information and develop anti fraud provisions for the systematic regulation and sale of securities. The major objectives of the rules and regulations would be the shareholder protection, failure of board and the controlling of shareholder responsibility and accountability for the shareholders (NAB, 2011). The development of a good corporate governance system would leads to the betterment of the existing financial system within the community and the entire organization. The achievement of outstanding corporate governance system can only be achieved through the implementation of rules and regulations which would lead to transparency of disclosure of financial information and also the certainty of the system within the systems (Paton, Juleff and Schachler, 2007). However, there should be uniformity in the rules and regulations to be formulated in each and every country this is because they should lay emphasis on the structuring of the balance within the equity and debt capital systems (OSL, 2013). This was one of the prime reasons that the scandal came into surface. In the year 2003, Parmalat was severely penalized for trying to raise 300 Million in the form of bonds (Word Socialist, 2004).Hence, this incident increased the chances of scrutiny of the investors as the company was already indebted and capitalized heavily (Taylor et al., 2005). This was one of the first signs of the crisis that had raised suspicion among the investors and market analyst. The doubts were also raised by the internal auditor, Deloitte & Touche accountant regarding an investment worth 478 Million made in the Cayman Island based mutual fund (World Finance, 2011). This accusation and accounting fraud forced the chairman of Parmalat to resign under sheer pressure. Conclusion It has been observed that the occurrence of accounting scandals has led to the introduction of several changes in the accounting rules and regulations. The Parmalat scandal had a negative impact on the European economy and also led to the alteration of several rules and regulations formulated by the accounting associations. However, with the emergence of these accounting scandals the significance and importance of the accurate auditing has come into prominence. Accurate auditing function is possible with the clarity in the accountings system followed in the organizations and the well defined functions to be followed by the auditor. The Parmalat case scandal signifies how auditor of repute can also perform wrong activities when business ethics is not implemented within the systems. Accurate auditing functions and financial reporting could have prevented Parmalat and other similar case scandals. Thus, it is observed that the implementation and practice of corporate governance mechanism, auditing procedure is instrumental in preventing inaccurate accounting procedure. Reference List Action Fraud, 2013. False Accounting Fraud. [Pdf] Action Fraud. Available at: < http://www.actionfraud.police.uk/fraud-protection/false-accounting-fraud > [Accessed 06 November 2013]. Caraballo, C., Cheerla, A. and Jafari, O., 2010. Satyam: Brotherly Demise the Rise and Fall of Ramalinga Raju [pdf] The George Washington University. Available at: < http://www.managedecisions.com/blog/wp-content/uploads/2010/07/Project_Term-Paper_SatyamScandal.pdf /> [Accessed 06 November 2013]. Carcello, J.V., Hermanson, D.R. and Raghunandan, K., 2005. 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