Parmalat case reaches critical phase as EU unveils auditing clampdown

Wednesday, March 24, 2004

The frenetic inquiry into the collapse of dairy giant Parmalat reaches a crucial phase this week when an Italian judge decides whether enough evidence exists to put three institutions and 29 people on trial for Europe's biggest corporate fraud.

Milan judge Guido Piffer is expected to decide within days whether to proceed with a fast-track trial that would see executives of the Bank of America and auditors Deloitte and Grant Thornton's Italian unit, Italaudit, in the dock.

Opting to skip potentially time-consuming preliminary hearings and to push for a trial as early as May underlines the confidence of the prosecutors, who have gathered thousands of pages of depositions and 150 interrogation transcripts during their three-month investigation into "Europe's Enron".

Parmalat's founder Calisto Tanzi, 65, his son Stefano, his brother Giovanni, and former chief financial officers Fausto Tonna and Luciano Del Soldato are among those accused of market rigging, falsfying audits and obstructing a market regulator.

In the 85 days since his arrest, prosecutors have been scrambling for clues about how the former chief executive ran up debts of more than $18.4 billion, and if, and to what extent, some of the world's biggest banks colluded in the fraud.

Parmalat's government-appointed administrator Enrico Bondi is weighing legal action to compel CSFB, UBS, Deutsche Bank, Banca Intesa, and Morgan Stanley to repay the dairy group several hundred million dollars.

Among the key questions prosecutors have sought to answer is why banks continued to lend Parmalat money while Tanzi allegedly siphoned off at least $600 million to loss-making family business Parmatour, as well as up to a billion dollars elsewhere for personal use.

"The banks that advised Parmalat came from the same pool as those that advised Enron and company," said Italian economist Marco Vitale.

"The same goes for the auditors and rating companies. They were the ones that invented the tricks and the applicable legal and corporate mechanisms."

Meanwhile, stung into action by the Parmalat scandal, the European Union executive last week unveiled a raft of proposals to beef up corporate auditing and stop crooks "cooking the books".

The European Commission called on EU member states to adopt the proposals quickly in a bid to prevent accounting skullduggery of the type alleged to have brought down the Italian food group.

Among the headline proposals are a requirement for EU companies to set up audit committees staffed by independent directors, and to switch their auditing partner periodically.

"Auditors are our major line of defence against crooks who want to cook the books. Parmalat was a reminder of what happens when that defence fails," EU Internal Market Commissioner Frits Bolkestein said.

"No-one is naive enough to think any directive will stop accounting fraud at a stroke. But what we are proposing would inject more rigor and a stronger dose of ethics into the audit process," he said.

Parmalat collapsed in December amid allegations of spectacular fraud to rival the downfall in 2001 of US energy giant Enron, another case that has inspired the EU commission's review.

Auditors Grant Thornton were responsible for checking the Parmalat group's accounts until 1999 and were succeeded as group accountants by Deloitte and Touche, although Grant Thornton remained responsible for auditing some offshore subsidiaries, including some registered in the Cayman Islands.

Parmalat was declared insolvent on 27 December after $4.9 billion believed to have been held by Bonlat Finance, one of Parmalat's Cayman-registered subsidiaries, was found to have been missing.

Under the commission proposals, EU governments would require a company to change the person responsible for doing its auditing every five years, while staying with the same accounting firm.

Or, they could require the audit firm itself to be rotated every seven years. The aim is to stop the accountancy giants building too close a relationship with the companies under audit. 

The proposals also lay down guidelines to prevent conflicts of interest for an accountancy company, which currently make most of their money from management consultancy and tag auditing work on as a cheap extra.

External directors would ensure the quality of the audit work and prevent untoward pressure being brought to bear on the audit firm by the company's board.

And the commission proposed to enshrine international co-operation with other corporate regulators, notably with the US Public Company Accounting Oversight Board (PCAOB).

That is recognition of the opaque financial structures favoured by some companies, which make it harder for regulators and auditors to detect cross-border wrongdoing.

The commission said it hoped the European Parliament and EU member states would adopt the proposals by mid-2005, underlining the issue should be a priority for the bloc.

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