Accounting giant KPMG said on Monday it was looking in horror at the book-keeping crisis at Italian food group Parmalat and there was evidence Italian financial markets needed a more pro-active regulator.
KPMG's global chairman, Mike Rake, said in unveiling his firm's annual results that a more interventionist regulator like Britain's Financial Services Authority might be needed.
“There's clearly some evidence that the Italian capital markets need a more proactive regulator,” Rake said, adding that KPMG was “looking on in horror” at the Parmalat crisis. The firm was not involved in auditing Parmalat.
The news in December of Parmalat's accounting shortfall, which prosecutors say could top 10 billion euros ($12.7 billion), has raised questions about Italy's regulators and the role played by Italian and international banks and auditors.
Last Thursday, Economy Minister Giulio Tremonti called for reforms that would include shifting some of the Bank of Italy's powers over bank mergers and financial instruments to the antitrust authority and to stock market regulator Consob.
The scandal cries out for accountants to “get back to basics”, Rake said. “The thing takes my breath away.”
He said it also undermined the case for accounting firms to be banned from auditing the same company's books for years on end — a reform Italy had adopted and which was urged on regulators worldwide in the wake of a string of mostly U.S. accounting scandals in the past few years.
“I think compulsory rotation of auditors actually allows obfuscation of the situation,” Rake said, adding that Italy was the only G-7 country to require rotation of audit firms. In other countries, only the individual accountants overseeing a firm's audit need to be rotated, not the firm itself.
KPMG FACES U.S. FINES
But Rake said KPMG had full confidence in its own auditor, Grant Thornton, which audited some Parmalat subsidiaries, including Bonlat, a Cayman Islands-based unit that reported a fictitious 3.95 billion euros bank account on its books.
“They did a good job for us,” he said of Grant Thornton.
KPMG, like its big global rivals PricewaterhouseCoopers, Ernst & Young and Deloitte and Touche, has not escaped criticism over its own audit practice, particularly in the United States.
Rake said he hoped to reach settlements in the next three or four months with the U.S. Internal Revenue Service over tax shelters and with the Securities and Exchange Commission (SEC) over the book-keeping of office equipment company Xerox.
“We are very optimistic that both these cases — neither of which will have significant financial implications — will be resolved hopefully in the next few months,” Rake said.
“We are determined to put them behind us, absolutely.”
A week ago, KPMG announced its deputy chairman would retire and it would make staff changes in its tax practice, weeks after being criticised by the U.S. government for encouraging tax shelters that cost the U.S. Treasury $1.4 billion.
KPMG has also been criticised over its auditing of Xerox, which in 2002 agreed to pay a $10 million penalty to settle SEC charges that it had manipulated its financial results to inflate profits. Xerox neither admitted nor denied wrongdoing.
KPMG reported a 13.4 percent rise in global revenues to $12.2 billion for the year ended September 30, 2003, though there were up only 5.4 percent excluding currency effects.