Ten Publicized Audit Failures
AFM 201 – Part 1 Auditing
Fall 2007
Group Assignment 2
Publicized Cases of Alleged
Audit Failures
Involving Large Public Companies
1) Ten Publicized Audit Failures
i. Parmalat (2003) - Deloitte & Touche Tohmatsu /Grant Thornton
Misleading investors with “Brazen Fraud” was what the United States (US) Securities and Exchange Commission (SEC) had sued Parmalat for in 2003. It all began when Parmalat defaulted on a bond payment worth $185 million. This raised a flag for auditors and banks, which then began to closely examine company accounts. According to Parmalat, 38% of their assets were apparently held in a Bank of America account, part of a subsidiary of Parmalat in the Cayman Islands, worth $4.9 billion dollars. This was later found to be untrue and no such account ever existed. Furthermore, assets were invented to offset liabilities valuing at almost $16.2 billion over a 15 year period, leading the company into a $9.2 billion bankruptcy. Grant Thornton, the auditor at the time of the events, was replaced by Deloitte & Touche Tohmatsu, claiming to be a victim of deceit in the Parmalat audit scandals.
ii. Adelphia (2002) - Deloitte & Touche Tohmatsu
Adelphia Communications was under Pennsylvania and New York federal grand jury, and SEC investigations for making off-balance-sheet loans, amounting to $3.1 billion, to the founders and former Chief Executive Officers (CEO) John Rigas and his sons. This was done by inflating capital expenses and hiding debt, which overstated results. The company itself filed a lawsuit against its former auditor, Deloitte for “professional negligence, breach of contract, fraud and other wrongful conduct,” then filed for bankruptcy protection. It was alleged that the financial performance was masked through deceptive accounting by the executives while pocketing profits for personal benefits without disclosures to the board of directors or the public.
iii. AOL Time Warner (2002) - Ernst & Young
At the time of the
Fall 2007
Group Assignment 2
Publicized Cases of Alleged
Audit Failures
Involving Large Public Companies
1) Ten Publicized Audit Failures
i. Parmalat (2003) - Deloitte & Touche Tohmatsu /Grant Thornton
Misleading investors with “Brazen Fraud” was what the United States (US) Securities and Exchange Commission (SEC) had sued Parmalat for in 2003. It all began when Parmalat defaulted on a bond payment worth $185 million. This raised a flag for auditors and banks, which then began to closely examine company accounts. According to Parmalat, 38% of their assets were apparently held in a Bank of America account, part of a subsidiary of Parmalat in the Cayman Islands, worth $4.9 billion dollars. This was later found to be untrue and no such account ever existed. Furthermore, assets were invented to offset liabilities valuing at almost $16.2 billion over a 15 year period, leading the company into a $9.2 billion bankruptcy. Grant Thornton, the auditor at the time of the events, was replaced by Deloitte & Touche Tohmatsu, claiming to be a victim of deceit in the Parmalat audit scandals.
ii. Adelphia (2002) - Deloitte & Touche Tohmatsu
Adelphia Communications was under Pennsylvania and New York federal grand jury, and SEC investigations for making off-balance-sheet loans, amounting to $3.1 billion, to the founders and former Chief Executive Officers (CEO) John Rigas and his sons. This was done by inflating capital expenses and hiding debt, which overstated results. The company itself filed a lawsuit against its former auditor, Deloitte for “professional negligence, breach of contract, fraud and other wrongful conduct,” then filed for bankruptcy protection. It was alleged that the financial performance was masked through deceptive accounting by the executives while pocketing profits for personal benefits without disclosures to the board of directors or the public.
iii. AOL Time Warner (2002) - Ernst & Young
At the time of the
Cited: 1. Smieliauskas, Bewley. "Auditing - An International Approach" McGraw-Hill Ryerson, 4th Edition (2007): 202, 203, 208. 2. Keiso, Weygandt, Warfiled, Young, Wiecek. " Intermediate Accounting – Volume One" JW Wiley, 8th Canadian Edition (2007): 58,59 DAMAGE $$