Deloitte failed to challenge $7 billion loan to Parmalat's Cayman subsidiary

Friday, March 19, 2004

According to a report by Bloomberg News, filings with Maltese regulators show that a Deloitte & Touche examiner in Malta approved the accounts of a Parmalat subsidiary, without challenging profits that flowed from a $7 billion loan to Bonlat Financing Corp, another Parmalat subsidiary registered in the Cayman Islands.

Although, Deloitte helped precipitate the collapse of the Italian dairy group Parmalat Finanziaria SpA by raising questions in October 2003 about transactions at Bonlat, Deloitte auditors should have raised doubts about the transactions six months earlier, say three accountants who read the statements at Bloomberg's request. 

The appearance of the Bonlat loan in Deloitte-audited accounts indicates that member firms of Deloitte Touche Tohmatsu, the world's No.2 accounting group, may have had a chance to uncover accounting irregularities at Parmalat before the company posted a 2002 profit of $308.8 million late last March and went on to raise more than $1 billion in fresh bond sales. 

"The one thing you've got to be sure of is that Bonlat number,'' David Cairns, a UK chartered accountant and former secretary-general of the forerunner of the International Accounting Standards Board, said in a telephone interview. "The $7 billion: Did it exist?'' 

The auditors' questions revolve around the 2002 accounts of Parmalat Capital Finance Ltd, a special-purpose entity that controls Bonlat. Capital Finance's 2002 profit jumped more than eightfold to $28.4 million because of interest from the Bonlat loan, according to the accounts dated 10 April, 2003, and filed with the Malta Financial Services Authority. That equaled 11 percent of Parmalat's group profit for the entire year. 

Milan-based Parmalat collapsed in December in Italy's biggest bankruptcy after saying a $4.9 billion account that Bonlat claimed to have at Bank of America was fictitious. 

That figure matches a $4.9 billion increase in the Bonlat loan account listed in the Deloitte-audited financial statements of Capital Finance. Parmalat has since defaulted on more than $8.5 billion worth of bonds. 

Edward Camilleri, the Deloitte auditor in Malta who signed the Capital Finance accounts, declined through his secretary to comment, referring questions to Oriana Pound, a London-based Deloitte spokeswoman. Pound cited an official statement on the matter. 

"Deloitte & Touche Malta believes it behaved properly throughout and in accordance with the relevant standards based on the information available to it at the time,'' it said. 

As part of the criminal probe into Parmalat's bankruptcy, Italian prosecutors are investigating two partners of Deloitte & Touche of Italy, which served as Parmalat's primary auditor between 1999 and 8 January this year, for allegedly making false statements and assisting securities-market manipulation. 

Both have denied any wrongdoing. In a 2 March statement that Deloitte Touche Tohmatsu issued on behalf of Deloitte & Touche SpA, the partners said they had "the right to rely'' on "clean audit opinions'' of Bonlat accounts issued by the former Italian member firm of Grant Thornton International, Parmalat's secondary auditor until January. 

Capital Finance was incorporated in the Cayman Islands in October 1997 for the purpose of selling preference shares, which have priority over other stock during dividend payments and liquidation proceedings. Capital Finance opened a branch in Malta on 1 April, 2002, when Deloitte & Touche of Malta picked up the audit from Grant Thornton SpA. 

Capital Finance's registered address on the Mediterranean island is Deloitte's office in the coastal town of Sliema. The registration obliged Capital Finance to file accounts with Malta's regulator, something it wasn't required to do in the Cayman Islands. The filings can be accessed on the website of Maltese regulators for a fee. 

Capital Finance owns 100 percent of Bonlat, which is also incorporated in the Cayman Islands. 

Italian prosecutors have called Bonlat "a garbage can'' where Parmalat dumped liabilities amassed around the globe, according to investigative documents obtained by Bloomberg News. 

The magistrates accuse Parmalat officials including former Chairman Calisto Tanzi, 65, of inflating revenue, fabricating assets and hiding losses through a web of offshore companies including Bonlat. 

Accountants from PricewaterhouseCoopers, hired by Parmalat's government-appointed admmistrator, Enrico Bondi, described in a 27 January report how previous managers sold bonds, funnelled proceeds to operating units and parked the repayment obligations at Bonlat. 

Milan prosecutors have also accused two accountants of the former Italian member firm of Grant Thornton International of designing Bonlat, proposing "fictitious operations,'' and falsely certifying accounts. 

Since Parmalat's collapse, Capital Finance has been caught up in bankruptcy-court battles in New York and the Caymans. On 20 February, provisional liquidators from Ernst & Young Ltd in Cayman said the only cash they found at the unit was $378,279 in an account at a New York bank, which claims the money itself. Ernst & Young didn't name the bank in the statement. 

Parmalat used Capital Finance and Bonlat to hide losses, according to the report by PwC investigators who are attempting to establish what happened to $7.5 billion raised from Parmalat bond sales between 1 January, 1998, and 30 November, 2003. 

The PwC study shows how Parmalat officials doled out proceeds from bond sales to operating companies and parked the obligation to repay the loans at Capital Finance and Bonlat. 

As of 30 November, 2003, the two Cayman companies were on the hook to repay about 80 percent of $6 billion raised by Dutch unit Parmalat Finance Corporation BV, even though they received no cash from the sales. 

Until the move to Malta in 2002, little was known about Capital Finance because Cayman regulators don't require such special-purpose entities to file accounts. 

That lack of disclosure didn't keep investors from buying securities in the unit, which according to the PwC report sold $600 million in preference shares and $530 million in bonds.

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