NEW YORK (Reuters) - As Italian food group Parmalat struggles through one of Europe's biggest corporate scandals, it has exposed the accounting profession's vulnerability to be duped by technology.
The gradual reluctance to deal with hard copies of original documents and use faxed and scanned copies and even electronic mails instead, have kept auditors on their toes, and they say the Parmalat case has now revealed the dark side of dealing with a paperless world.
The scandal at Parmalat centers around a nonexistent sum of 3.95 billion euros which was deemed to be in a bank account that a Parmalat subsidiary had with Bank of America, and Italian prosecutors say a scanning machine had been used to forge documents relating to that account.
Grant Thornton, the firm that audited the accounts of Bonlat, the subsidiary, should have asked for original bank documents, especially when the bank account was supposed to have held a sum of money roughly over 30 percent of Parmalat's supposed assets, experts said on Wednesday.
"Auditors need to make sure they are looking at real documents, in addition to photocopies and faxes, and they should be confirming as much as possible with outside parties like banks, customers and so forth," said Craig Greene, a Certified Fraud Examiner specializing in financial investigations and founding partner of Chicago accounting firm McGovern & Greene.
"Those standards should have been adhered to, they (the auditors) clearly did not do their job," said Greene.
Grant Thornton said late on Tuesday it believed it is a likely victim of a fraud committed by third parties and is cooperating with Italian investigators.
Fraud experts fear that with businesses worldwide using more scanned images and PDF documents in lieu of original documents, the chances of financial fraud is now greater than ever.
"Now a standard audit should include contacting a certain number of vendors, creditors, business partners, just to confirm the validity of financial statements," said Scott Moritz, a former FBI agent and now a managing director with IPSA International, an investigating firm specializing in forensic accounting.
The accounting industry has come under sharp criticism since the fall of U.S. energy trader Enron Corp, which eventually led to the collapse of Enron's accounting firm Andersen.
While steps are being taken to tighten accounting standards on both sides of the Atlantic, experts say technology will remain an auditor's nightmare.
"Auditors are not trained or skilled in evaluating documents for authenticity and, unfortunately, with the new generation of computers, auditors face a very difficult time in identifying what is original and what is not," said Toby Bishop, President and Chief Executive of Austin, Texas-based Certified Fraud Examiners, the global body of anti-fraud specialists.
In the 1980s the U.S. carpet cleaning firm ZZZ Best Corp. was brought down by accounting fraud involving creation of fictitious accounts using a photocopy machine. According to Greene, some fraudsters have also tried to fabricate income statements by creating dated Excel spreadsheets.
The various technical wizardry including scanning machines and publishing tools have made it easier to commit financial fraud. "It is a lot easier today to falsify a set of financial statements or a set of books today," said Greene.