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Case Study on Parmalat Accounting Scam

Introduction:

Parmalat is huge daily product company of Italy, the eighth largest industrial group of the country. Its main factory is located in Collecchico near Parma, northern Italy. The company is conspicuous by its presence in 30 countries, employs more than 36,000 staff and had a turnover of nearly 7.6 billion Euros or about 15 trillion lira (its old currency) in 2002.

The company came into disrepute in early Dec 2003 when a document purporting to certify that Bank of America held about four billion Euros for Parmalat's offshore unit Bonlat was declared false by the said Banker.

This obviously created a quake of sorts in Italy and when the Company board picked up the balance sheet for scrutiny, they found a big hole, as the assets side seemed to have vaporized. This case seems to be one of the latest additions to long list of notable account in scams.

A 4-billion euro or $5 billion alleged accounting scandal by Parmalat deepened when the Italian food group's founder and three former finance directors were targeted in a criminal probe.

As the prosecutors and the investigating agencies are trying to unravel a complex web of financial transactions allegedly perpetrated by top executives of Parmalat, which is being called as Europe's Enron, a rescue management team is weighting up the best option for bankruptcy protection.

Facts of the Case:

This case exploded into one of the Europe's worst corporate scandals in early Dec. 2003 when a document of the firm showing 3.95 billion Euros held by a Cayman Island unit, Bonlat Financing Corporation, had been declared false by the Bank of America.

The prosecutors registered a fraud case in Dec. 2003 and named in their report Parmalat's founder Mr.Calisto Tanzi, who is reported to have resigned recently as chairman and CEO of Italy's biggest food group.

The available facts indicate possible involvement of former chief Financial Officers Messrs Fausto Tonna, Alberto Ferrari and Luciano Del Soldato, all of whom held the post during 2003. The last two admitted providing false information, when questioned by the authorities, but said that the plan was hatched by both Mr. Tanzi and Mr. Tonna.

The size of this fraud is estimated to snowball to a figure as big as 10 billion euros, thus dwarfing a 1 billion euro accounting scandal at Dutch retailer Ahold and comparing well with the scam induced collapse of energy giant Enron.

In that this may emerge to be one of the Europe's biggest accounting scandals so far. Parmalat's newly appointed chairman and CEO, Mr. Enrico Bondi is reported to have met Industry Minister, Mr. Antonio Marzano on 23-12-2003, who is required to name an administrator for Parmalat.

It is reported the Prime Minister, Mr. Silvio Burluscom's cabinet could approve a decree dealing with the Parmalat crisis and shield Mr. Bondi and his team from any legal action while they attempt a turnaround, similar to U.S. chapter 11. The Italian police has already taken documents from Parmalat's main auditor Deloittee & Touche.

Parmalat owes Italian dairy farmers about 120 million Euros ($ 149 million) and has not paid for milk supplies for the last 6 months (August, 2003) as per farmers group Confagricoltura. US Banks are also believed to have given big loans to Parmalat. As per Standard and Poor, the "on and off balance sheet exposures of Bank of America to the Parmalat Group are significant but manageable" given the Bank's huge resources.

Keeping the revelations of the company's exposure so far, it appears that the default amount can go up to 7 billion Euros of bonds as the group failed to find the cash to repay a 150 million euro debt issue on time in early December, 2003. That was despite showing 4.2 billion euro of liquidity on its books.

Parmalat and Role of Banks:

As per emerging signs, Parmalat's financial deceptions may have been going on at least for the last four years. Investigators are likely to examine the role at least Citigroup Incand Merrill Lynch & Co., while Parmalat investors are still not clear of a transaction called "black hole' arranged by Citi Group Inc. which was a place since 1999 but not known to most.

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Another Transaction from that year has also surfaced. Through a financial product called a "Credit - linked note", Parmalat in effect bet on its own creditworthiness. The transaction, arranged by Merrill Lynch & Co., highlights the way in which financial engineering can give a misleading picture of corporate health to outsiders.

While the amount involved in the deal $ 39 million or euro 30.6 million at current exchange rates, according to a preliminary term sheet of August 2, 1999 - is relatively small compared with the $ 4.8 billion of cash the company is missing, the transaction points to a potentially bigger problem in reality, the assets and investments on Parmalat's balance sheet may be much less than they appear.

Friends and neighbours are never tired of reeling off the homely features of his life: to bed at 10.30 P.M. at the office by 7.00 A.M., on the job six days a week, mass every Sunday.

The employees and others who have flown with him on his Bombardier corporate jet marvel; the boss was always cutting the salami himself and serving it to his Guests. "He is 50, low key, he could have been one of his factory workers" says Gabriella Rossi, 75, who attends the same church as the Tanzi family.

Mr. Tanzi was an innovator, an early adopter. In mid-60's when he was hardly 25, he baffled his friends by revealing his plans to them to bring to Italy a new Swedish technology for packing milk in cardboard cartons, which then looked unbelievable. But he did it. The process-known as ultra-high temperature pasteurization turned the company into a global giant.

For years, Mr. Tanzi ducked the limelight. But as Parmalat flourished, it became the engine of growth for that area. Today, some 5000 food production units and distribution companies in the area depend on Parmalat for their livelihoods.

Slowly but steadily, with that wealth, Mr. Tanzi cultivated ties with Italy's great and good especially in the Catholic Church. In 1967, he financed the opening of a drug-rehabilitation center run by the local priests. In 1970's he helped open a home for single mothers and for abandoned children and threw open his house to the homeless on Fridays for free milk and cookies.

The Parmalat chopper was used so frequently to ferry about Vatican officials in the 1970s and 1980s that Italians nicknamed it. "God's helicopter". Further, in 1998, when monsignor Grisenti needed urgent medical treatment in Mayo clinic in Minnesota, "Mr. Tanzi lent him the corporate jet". "Mr. Tanzi is a man of great human and Christian sentiments", Mr. Grisenti says.

The only people who are not crying for Mr. Tanzi but cursing him are dairy farmers grip of Confagricultura as they blame him and Parmalat for not paying them for milk supplies since August 2003. The company owes Italian farmers more than $ 120 million.

Mr. Tanzi has been named in the present scam and is reported to have left the country for a short while to rest, but has promised to speak to everyone, including prosecutors as soon as he returns. It seems the Parma people have been hurt a lot by the downfall of Parmalat chief.

They are not prepared to believe or buy the scam theory which Tanzi might not been knowing about, much less involved in. In fact, Parma people even now are not prepared to forget that Mr. Tanzi was and still is patron of art, sports, church and charity; and often flying in 'God's helicopters'.

Parmalat's Chairman Arrested:

Parmalat's Chairman Mr. Tanzi was arrested and put into jail during the last days of December, 2003 for allegedly misappropriating millions of Euros, which can be called as one of the history's most brazen corporate frauds.

Government and the judiciary believe that Calisto Tanzi was instrumental in getting the Co's accounts falsified since early 1990's, thus pushing the eight largest industrial group company of Italy into insolvency, which as per prosecutors may be as big as $ 12.5 - 16.2 billion.

Mr. Tanzi is reported to have confessed to investigators to have funneled around Euros 500 million from Parmalat into other group companies, including Parmalatour, a family owned tourism company, as per one of his defense lawyers. As per judicial sources, he also admitted to falsifying accounts.

Investigators feel that the scam amount may exceed Euros 10 billion Parmalat's missing billions have drawn comparisons with collapse into bankruptcy of US en erg trading giant. Enron two years ago, and raised questions about the effectiveness of regulators, banks, auditors, company Board, audit committees and the rating agencies.

Thus, US Securities & Exchange Commission (SEC) is filing a suit against Parmalat seeking sizeable fines and accusing the group of misleading the bond investors in "one of the largest and most brazen corporate financial frauds in history.

It is also investigating the role of Bank of America and some other Banks to ascertain whether they were negligent or reckless, including collusion in selling Parmalat's Bonds. Mr. Lawrence West, associate director, enforcement at SEC is reported to have observed "we need to understand if the Bank of America and other Banks acted in a way that was negligent or reckless or otherwise".

Among 20 people under investigation in the case are the Chairman and a partner of the auditing firm Grand Thornton SPA, accused by the prosecutors of helping Parmalat organize a web of offshore companies that concealed the firms' losses. Parmalat's balance sheet as on September, 2003 shows debts of 6 billion euros; but as per Milan's prosecutor's the debt might add up to $ 30 billion. As per the government appointed administrator, it is premature to speculate about the size of the debts.

On January 1, 2004 Italian Police is reported to have arrested Senior Finance, Accounting and Legal executive associated with the group and warrants were issued by the Magistrate against the Head of Parmalat Venezuela. Meanwhile, the US Security Inspectors arrived in Italy and the Magistrate summoned Sao Paoli Imi bank President Rainer Masera for questioning. This is one of the biggest banking groups of Italy.

Issues for Discussion:

1. Can a person who is a well-known patron of arts, sports, church and various charities, conscious of business ethics and social responsibility, indulge in such law act of corporate corruption?

2. What can be the possible role of Bank of America and other banks involved is selling and promoting the Company's Bond issue, when the Company's financial standing was not good for the last 7-8 years. Further, how were the letter heads of Bank of America used by the finance Manages of Parmalat in creating the fiasco?

3. Has the fraud taken place in Parmalat due to insufficient internal checks and balances?

4. Is it possible for the bankers of the Company to remain ignorant about the financial condition of its client for about a decade?