UK: Cooking the Books at Parmalat

As Parmalat executives last December took a hammer to a
computer at headquarters and crudely attempted to
destroy evidence, one of the most damning files under
attack was "Account 999".

The file survived. A print-out of Account 999 and its
Euros 8,056,131,103.09 debit is now one of many
bizarre centrepieces for charges being prepared
against former Parmalat managers and Deloitte Italy,
the bankrupt dairy group's primary auditor.

The document also is key to reconstructing how Calisto
Tanzi, Parmalat's founder, hid years of mounting
losses until his edifice collapsed last December under
Euros 14.5bn (Dollars 17bn) of debt and no cash.

A report prepared for prosecutors by a special
consultant, obtained by the Financial Times, describes
Account 999 and dozens of other instances when
investigators believe Deloitte's Italian office, in
particular, failed to apply basic accounting
principles and verify "irregular" and "suspect"
accounting entries.

The report details how Deloitte Italy, which
co-ordinated the audit of Parmalat's worldwide
operations, repeatedly ignored and buried evidence of
accounting irregularities uncovered by sister offices
in Brazil, Argentina, Mexico, Portugal, the US and

Other people familiar with the group describe similar
instances involving other countries.

Deloitte Italy and Parmalat's top executives also
appear to have successfully lobbied Deloitte's US
global headquarters to intervene in Brazil and remove
an auditor there who had raised too many embarrassing
questions, three people familiar with the incident

The episodes, accounting industry experts say,
highlight the need for better internal controls at
some auditing firms and the ease with which large
clients can bully auditors hungry for fees.

Deloitte began auditing Parmalat in 2000, reviewing
consolidated accounts for 1999. As such, it arrived at
least 10 years after Parmalat executives began to cook
the books and create "one of the largest and most
brazen corporate financial frauds in history", as the
US Securities and Exchange Commission stated in a
recent lawsuit.

Account 999, however, was an Euros 8bn clue that
something was terribly wrong.

Gianfranco Bocchi, a former Parmalat accountant, told
investigators the account, essentially a computer
document, was shown to Deloitte Italy auditors. The
account, he said, was a "trash bin" for all the faked
revenues, assets and profits that Parmalat had
accumulated over the years. To cover up the fake
transactions, the entries were transformed into
intercompany loans and credits.

Companies regularly compile a document listing
intercompany transactions among subsidiaries. On a
consolidated basis, they cancel each other out - one
unit's debt is another's credit.

A company the size and complexity of Parmalat normally
could have an intercompany imbalance at year-end of
between Euros 200,000 to Euros 400,000 at most, due to
currency fluctuations or one or two unusual factors,
one accountant familiar with Parmalat said.

The first thing an auditor does to prepare
consolidated accounts is to balance out intercompany
transactions, and Deloitte "missed it by Euros 8bn",
he noted.

Deloitte declined to comment on details of the report.
The accounting firm reiterated earlier statements that
it believed "Deloitte Italy behaved properly and in
accordance with the national standards in force at the
time". It also said the "proper place for the full
facts to emerge is in the courts and not in the

Deloitte Italy essentially controlled the audit
reports for Parmalat's non-Italian units. Often when a
non-Italian auditor worried about a Parmalat
subsidiary's balance sheet, Deloitte Italy would get
Parmalat's top executives to write guarantees pledging
that the Italian parent company or one of its
financial subsidiaries could cover potential losses.

Parmalat executives themselves intervened in more
heavy-handed ways. In Argentina, when Deloitte
partners there raised doubts in 2000 about several
issues, Fausto Tonna, the group's former chief
financial officer, threatened to fire Deloitte
Argentina and called their requests "offensive and

Mr Tanzi then wrote a letter to Parmalat Argentina
guaranteeing financing from the Italian parent should
it need it, and the issue disappeared. Deloitte
Argentina continued to work for Parmalat.

A partner at another accounting firm said: "If a chief
executive vouches for a credit, the auditor isn't
going to probe much more . .. But the executive very
rarely lies."

In Brazil, one of Deloitte's auditors raised numerous
concerns in 2001 and 2002 about the growing
intercompany credit that made up the assets of
Parmalat Participacoes do Brasil, the group's largest
foreign subsidiary.

By spring 2002, Wanderley Olivetti, the auditor, asked
for a "comfort letter", a mild form of guarantee, for
Dollars 554m in credits owed to PPdB by Bonlat, a
Cayman Islands financial subsidiary of Parmalat. It is
not clear whether a comfort letter was ever sent, but
PPdB's 2001 audit contains only a mild qualification
from Deloitte on some issues, as does that of 2002.

Mr Olivetti did not return phone calls.

Similar accounting discrepancies were uncovered by
local Deloitte offices in Mexico, Costa Rica,
Nicaragua, Venezuela, Ecuador, the US, Canada, and
Portugal, the prosecutors' report and other people
familiar with the case said. A former Parmalat
employee described the acquisition of one Central
American company by Parmalat for Dollars 25m: "The
seller got Dollars 5m. The rest went to politicians,
middlemen, Parmalat executives. But you had to account
for it as Dollars 25m even though it was worth Dollars


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