The rise and fall of Parmalat was an important event as it highlighted the corporate governance issues in the corporate world of Italy. Parmalat was found by Calisto Tanzi, CEO and Chairman, in 1961 with a pasteurisation plant in Italy. The company was headquartered in Italy and had grown to be a multinational company into all sorts of milk products, beverages and bakery goods. Three decades later, in 1990, it became a publicly traded entity and was listed on the Milan stock exchange. Although Parmalat had become a publicly traded company yet it was similar to other European companies in which they were ran as a giant family business with highly centralized power structure. Most company decisions were made at the top by the CEO with financial information available only to the CEO and Chief Accounting Officer. The board of directors of Parmalat also lacked independence as revealed in the latest and final filing. There was not an independent board of directors that was not subject to the influence by the Tanzi family to act as a protection to the integrity of the company operation and safeguard of the company assets. We will examine the nature of the Parmalat accounting fraud, the process leading to the identification of the fraud, the external and internal responses to the fraud and finally, a discussion in which the Parmalat scandal could have been prevented if certain independent controls and mandatory regulations were in place.
Nature and Context of the Parmalat Fraud
The setup of the Parmalat group was a typical complex structure of a centralized, few shareholders and family-owned business in the European Union. The strong blockholder of the Parmalat group was the Tanzi family. Parmalat S.p.A was the core of Parmalat group and owned by Parmalat Finanziaria and Dalmata Srl with 89.18 per cent and 10.82 per cent of voting shares respectively. Parmalat Finanziaria was owned by Coloniale S.p.A with 50.05 per cent of the company voting share capital held directly and indirectly by the Tanzi family’s holding companies, thus the Tanzi’s would have complete control of the Parmalat group due to the majority block of ownership of Parmalat Finanziaria. Parmalat Finanziaria was listed on the Milan Stock Exchange and in the United States but Parmalat S.p.A had remained as a privately held company. From 1990 to 2003, the aggressive expansion of Parmalat through acquisition into North and South America, Australia and southern Africa had made Parmalat a global giant in dairy products and most prominent in the Western hemisphere of the world. The acquisitions were financed through debts in the form of bonds with both Italian and non-Italian banks totaling in 8 billion euros. Parmalat had been borrowing money from global banks like Bank of America, Citigroup and Deutsche Bank and justifying these loans by inflating its revenues through fictitious sales to retailers. Parmalat continued to raise more than 13.2 billion euros in both debt and equity from investors in Europe and US. These proceeds were then diverted to cover expiring bonds as these bonds were generated without the backup from assets in the first place. These bonds led to the questionable accounting practices as Parmalat was selling itself credit linked notes in order to create assets out of the air. Meanwhile some of this money was fraudulently used to enrich family members and private companies like Parmatour which was controlled by the family trust.
The international expansion strategy through acquisitions was not successful and ended up losing more and more money. Parmalat needed to hide the extent of the loss by creating fake profits to avoid negative consequences to its financial statements. Non-existing assets were generated to show profits, obtain further debts, increase its stock valuation and project the wrong financial market position to show shareholders and lenders. The falsely painted financial picture of Parmalat was...