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International Accounting Fraud

Accounting fraud is an existing problem in countries around the world. There are always greedy CEOs and accountants who turn to the rules to make a big profit. While there are accounting principles and standards that may differ from country to country, there is one thing that remains the same regardless; gains and losses. Today, the average person is smart enough to find the smallest ways to make extra profit from a company that may be doing well, or plummeting. The main focus of this article is to look at two European countries, Italy and Germany, and discuss some accounting fraud cases that occurred several years ago, before fraud became such a big problem.

For anyone familiar with the culture in Italy, football is well known as a huge sport. Football, also known as soccer in Europe, is a huge business that draws a lot of revenue from fans and other teams. Most Italian football teams spend a lot of time reporting profits in their financial statements because the amount of money paid to players as a salary is very high. To get around this, the owners of these football teams saw an escape route. When a team needs more money to run their franchise, they can sell their players. When a company sells a player, there is a transfer fee. Also, the player is considered an intangible asset to the club because it provides services over its useful life. If a player is sold to a team during the transfer period, the other club can record this as a profit or loss depending on the value of the book and the price paid. As a result, the owners of these clubs had made “creative gains”. If club A wanted more profits, and club B wanted more profits, they would come together to sell a player at an inflated rate. Both clubs would be getting a player at a price much higher than their historical book value, so they get a gain recorded in their financial statements. Milan FC and AC Milan used to sell players to each other for $ 3 million over their book value.

Now we will branch from the sports industry to the biggest accounting fraud to date in Italy called Parmalat. Parmalat has been the largest milk processor in Italy since 1960. During the 80s and 90s, Parmalat was equal to Enron in the US economy. Parmalat created a number of different subsidiaries in other countries and stated on its financial statements that these subsidiaries were making large profits every year. The CEO of Parmalat has admitted to forging several fake corporate accounts to conceal up to $ 150 billion of “Fake Money,” preventing the company from declaring bankruptcy. They created counterfeit assets, exaggerated sales revenue, and hid everything from the IRS until 2003. During their time in business, their subsidiaries entered into counterfeit transactions to attract more revenue, some customers who were double billing, with customers over-billing their “manufacturing cost” was the rationale for a higher price Parmalat was considered the “European Enron” in Italy and began to introduce new laws and regulations to do this prevent again.

When you look at accounting fraud in Germany, there is no comparison to Parmalat ‘s major financial fraud. ComRoad was one of the major accounting scandals in Germany; a company that made GPS systems for vehicles. ComRoad was the main supplier for vehicles in Germany, but they also sold internationally. Once there, they struggled to make a profit and sold their stock below their share price. A year later they were reporting huge spikes in their revenue, and KPMG auditors were notified of this. Auditors eventually found that ComRoad was reporting 87% of its revenue from a company called VT Electronics, which is based out of Asia. This company was a “phantom” company, or more simply a made up company. ComRoad was creating fake order sheets, fake financial transactions and creating an incompatible paper corridor. They said VT Electronics only accounted for 57% of their revenue, but in reality the correct amount was 87%. The CEO even falsified manufacturing accounts saying that they were producing GPS systems for this fake company, but in reality none of their resources were being used. This gave them a false cash flow that they could use to increase profits and drive their share price even higher.

No matter how established and accurate the accounting principles may be in a country, there will always be fraud. The unfortunate truth is that it is very easy to commit fraud. The amount of white collar crime in the world is constantly increasing, but it is related to GAAP principles that will always be able to impose on these companies. Europe is changing its account quality almost every year, just like the United States, but there is always one big fraud that causes big changes. Parmalat had an impact on European accounting life just as Enron did in the United States, and had a greater impact on accounting standards and regulations than any other case of fraud in modern history.

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