Accounting fraud is an existing problem in countries around the world. There are always greedy CEOs and accountants bending the rules to make a big profit. Although there are accounting principles and standards that may differ from country to country, there is one thing that remains the same despite everything; Earnings and loses. In today’s age, the average person is smart enough to find the smallest ways to earn extra profit from a business that may be doing well or may be going downhill. The main focus of this article is to analyze two European countries, Italy and Germany, and to analyze certain cases of accounting fraud that occurred several years ago, before fraud became such a big problem.
For anyone who knows the culture of Italy, it is well known that soccer is a great sport. Soccer, known as soccer in Europe, is a big business that earns a lot of revenue from fans and other teams. Most Italian soccer teams have a hard time reporting a profit on their financial statements because the amount of money paid to players as salary is so high. To get around this, the owners of these soccer teams saw a loophole. When a team needs more money to run its franchise, it can sell its players. When a company sells a player, there is a transfer fee. In addition, the player is considered an intangible asset for the club because he is providing services throughout his useful life. If a player is sold to one team during the transfer period, the other club may record it as a gain or loss based on book value and the price paid. This led to “creative gains” made by the owners of these clubs. If club A needed more profit and club B needed more profit, they would conspire together to sell themselves a player at an inflated price. Both clubs would be receiving a player for a price well above his historical book value, so they make a profit on their financial statements. Milan FC and AC Milan used to sell players for $3 million above book value.
We will now move away from the sports industry to the biggest accounting fraud to date in Italy called Parmalat. Parmalat was the largest milk processor in Italy since 1960. During the 1980s and 1990s, Parmalat was equivalent to Enron in the US economy. Parmalat created several different subsidiaries in other countries and declared in its financial statements that these subsidiaries made large profits every year. The Parmalat CEO has admitted that he made several fake corporate accounts to hide up to $150 billion of “fake money” and prevent the company from filing for bankruptcy. They created fake assets, exaggerated sales proceeds, and hid everything from the IRS until 2003. Throughout their time in business, their subsidiaries made false transactions to get more revenue, double-billed certain customers, and overbilled customers. customers saying that their “manufacturing cost” was the reasoning for a higher price. Parmalat was billed as the “European Enron” in Italy and a spate of new laws and regulations began to prevent this from happening again.
When looking at the accounting fraud in Germany, there is no comparison to the great financial fraud at Parmalat. One of the major accounting scandals in Germany was ComRoad; a company that manufactured GPS systems for vehicles. ComRoad was the main supplier of vehicles in Germany, but also sold internationally. At the beginning of their existence, they were struggling to make a profit, so they sold their shares below their share price. A year later, they reported large increases in revenue, and this was reported by KPMG auditors. Auditors eventually found that ComRoad reported 87% of its revenue from a company called VT Electronics, based in Asia. This company was a “ghost” company, or in simpler words, a made-up company. ComRoad was creating bogus order forms, bogus financial transactions, and creating a mismatched paper record. They claimed that VT Electronics was only 57% of their revenue, but actually the correct amount was 87%. The CEO even made fake manufacturing accounts saying they were producing GPS systems for this fake company, but none of their resources were actually being used. This gave them a fake cash flow that they could use to increase profits and further increase their share price.
No matter how established and precise accounting principles may be in a country, there will always be fraud. The unfortunate truth is that fraud is very easy to commit. The amount of white collar crime in the world is always increasing, but it all comes down to GAAP principles that can always make these companies stand out. Europe has been changing its account standards almost every year, as has the United States, but there is always a big fraud that causes major changes. Parmalat had an impact on the European accounting world just as Enron did in the United States, and had an impact on accounting rules and regulations more than any other fraud case in modern history.