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Accounting fraud at two major companies has led to major changes in standards and practices to address and prevent future confirmation fraud related issues. Paramalat was the largest food company in Italy until it filed bankruptcy in December 2003. For ten years leading up its bankruptcy, Parmalat covered up its losses by falsifying company accounts and using complex financial transactions to shore up its balance sheet. In November 2003 after Parmalat defaulted on a $185 million bond payment, auditors soon discovered that 38 percent of the company's assets were held in a non-existent $4.9 billion bank account in the Cayman Islands. As a result, stock prices plummeted and hundreds of thousands of Parmalat investors lost an enormous amount of money. It was the largest bankruptcy ever of a European company.
The investigation showed that the auditors did send a request to the bank asking to confirm the Cayman Islands bank account in December 2002, and after a few months the auditor received a signed response on the bank's letterhead confirming that the account existed. The auditor never suspected that bank's response letter was actually a forgery, created by someone at Parmalat. Had the auditor followed the general auditing standards, the $4.9 billion discrepancy on their balance sheet would have been discovered much sooner.
In 2005, the Securities and Exchange Commission (SEC) filed complaints against numerous individuals alleging that they aided and abetted a financial fraud by signing and returning materially false audit confirmation letters sent to them by auditors of U.S. Foodservice, Inc., a subsidiary of Royal Ahold. In doing so, the Commission alleges that U.S. Foodservice inflated its promotional allowance income by $700 million for fiscal years 2001 and 2002, causing Ahold to report materially false operating and net income for these years. The Commission views the use of third party confirmations as an important part of the audit process and will hold anyone accountable if they try to circumvent it.
In light of such egregious confirmation fraud related issues, the American Institute of Certified Public Accountants (AICPA), the Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have all issued either new or proposed guidance on their standards relating to audit confirmations. While many other companies were involved in major accounting scandals in recent years, auditors acknowledge that using paper confirmation forms is time-consuming and makes it nearly impossible to follow the requirements of a Generally Accepted Auditing Standards (GAAS) audit.
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Capital Confirmation provides secure electronic audit confirmation services for auditors, those responding to confirmation requests and their shared client.
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