Parmalat represented brilliant example of Italian economic marvel

To most Italians, prior to 2003, Parmalat represented a superb illustration of the Italian economic wonder. Calisto Tanzi, Parmalat ‘s laminitis had taken over his household ‘s salami and conserves concern and had transformed it into an industrial giant in the clip of 30 old ages.

Calisto Tanzi started by using new engineerings to the milk concern. Along with milk, Parmalat besides branched out into other countries such as juices, sauces, baking merchandises, yoghurts, soups and mineral H2O. Parmalat grew at a phenomenal rate of 50 % a twelvemonth. Tanzi diversified his concern with acquisitions of Television channel ( Odean TV ) , association football nine ( Parma F.C. ) and touristry ( Parmatour ) .

Parmalat Finanziaria Spa, a keeping company was listed on Milan stock exchange in 1989. The Tanzi household was the controlling stockholder via a non-listed company. It was a group of 58 companies ( 33 based outside Italy ) with aggregative gross revenues of $ 720 million. The acquisition thrust became more intense in the 1990 ‘s with the aggregative gross revenues of $ 3.6 billion in 1996 and about $ 10 billion in 2002. But most of his acquisitions were financed with debt.

The Collapse

A really typical facet of Parmalat ‘s balance sheet was the presence of high degrees of debt and hard currency at the same clip. In malice of the assorted acquisitions the company faced terrible losingss. The undertakings including association football squad and the touristry company were under immense debts. Even with this lack Parmalat enjoyed an investing class recognition evaluation and was able to borrow increasing sums of capital from the investors. The group was still prosecuting its evident scheme of keeping a immense sum of hard currency to be used in amalgamations and acquisitions whilst financing its hard currency demands through bonds. At the terminal of 2002 Parmalat Finanziaria was the listed retention of a transnational nutrient group made up of more than 200 companies spread about 50 states.

In 2002, the one-year studies indicated $ 4.3 billion hard currency against $ 9.3 billion of debts. The world was that most of the hard currency reported in the balance sheet did non be i.e. it had already been consumed. Tanzi ‘s imperium collapsed in December 2003. Parmalat defaulted on a‚¬ 150 million bond. The direction claimed that this had occurred because a client, a bad fund named Epicurum Fund defaulted on its measures. However it was shortly found out the Epicurum Fund was owned by Parmalat. As a consequence S & A ; P downgraded the bonds to debris degree and the portion monetary values collapsed dramatically. Calisto Tanzi admitted of the deceitful activities and an probe was commissioned.

The Fraud Triangle

The fraud trigon can be competently used to exemplify the stages of fraud. There are three factors to a fraud trigon and each of them is explained below in relation to Parmalat Scandal.

Perceived Opportunity: An chance is by and large provided as a consequence of failing in internal control system such as deficiency of policies and processs, easy to entree information and deficiency of supervising & A ; reappraisal.

Lack in corporate administration ordinances: Parmalat was a company with concentrated ownership. The Tanzi household was the controlling stockholder. From the instance it is clear that they were the dominant stockholders and had ample chances to expropriate investors. Mr. Tanzi who was the CEO and Director of Board had full control over determinations. The other board members instead than stand foring the faceless stockholders, bonded with the direction who had the ultimate power to choose or take them.

Loopholes in Italian corporate and securities jurisprudence: The Parmalat dirt took topographic point during the term of Italy ‘s billionaire media mogul Silvio Berlusconi as a premier curate. He promoted the statute law to cut down punishments for bogus accounting alternatively of increasing them. This provided more chances to perpetrate deceitful activities.

Perceived Pressure: Organizations ever face force per unit area to accomplish unrealistic and unachievable fiscal ends, improved net incomes and higher portion monetary values.

In instance of Parmalat, Tanzi was ever under changeless fiscal force per unit area to cut down the ever-growing debts. Business ventures like Parmatour and Parma F.C. were debt ridden. Huge sum of capital were invested in these ventures which had been running at loss from get downing. The company tried to conceal its fiscal loss every twelvemonth which turned into a muss.

Rationalization: It is really hard to understand how Calisto Tanzi would warrant his deceitful actions which led to 1000s of occupation cuts, lost of investor ‘s money etc. Though some might believe that his immense contributions to assist the hapless and ill, reconstruct old churches and spread consciousness approximately AIDS as a philanthropic gesture to warrant his incorrect behaviors, other might differ.

Significant frauds involved in the Parmalat Scandal

Parmalat Scandal is a authoritative illustration of occupational fraud. The types of fraud allegedly carried out by Calisto Tanzi and his executives are infinite. Some of them bare similarities to those of Enron, while others are of a more simple character.

False fiscal records

During the probe it was realized that Parmalat ‘s fiscal statements had been false for a long clip. The technique used was rather simple. Parmalat hid the losingss, overstated assets or recorded non-existent assets, understated its debts and diverted company hard currency to household members. It recorded non-existent redemptions of bonds. It sold receivables falsely described as non resort, in order to take the liabilities from the records. It mischaracterized debt or, merely, did non enter it.

Fake Companies

Harmonizing to some charges, legion shell companies were set up to bring forth bogus net incomes for Parmalat. Economic experts and analysts determined to the function of these entities as one of the assorted tactics to understate debt and fell losingss.

Asset Misappropriation

Mr. Tanzi had had invested in assorted other concern ventures apart from milk and dairy merchandises. A Television channel ( Odean TV ) was one of the ventures that went bankrupt. Mr. Tanzi had guaranteed to pay out the debt. During the condemnable probes it came to visible radiation that the money to cover the Television channel ‘s debt was paid via Parmalat. This was foremost of the many big instances where Parmalat ‘s money was used to cover Mr. Tanzi ‘s debt in other concern countries. It was besides revealed that immense sums of money were siphoned-off to Mr. Tanzi ‘s household.

Parmalat owned assorted wholly-owned subordinates, amongst which the most important was Bonlat. It was a waste basket of the group for the last 5 old ages of its life situated in Cayman Islands. It was the holder of the Bank of America ‘s false history. Bad receivables were transferred from the operating companies to these nominee entities, where their existent value was hidden. Fabricated trades and fiscal minutess were organized to countervail losingss of operating subordinates and to blow up assets and incomes. Securitization strategies based on false trade receivables and extra bills were recurrently used to finance the group. This strategy allowed Parmalat to have something like 1 billion in loans from Bankss while entering them as assets, which gave rise to Parmalat ‘s overestimate. In short, Parmalat and its Confederates were runing something similar to a Ponzi strategy.

On December 11 2003, Consob ( Italian equivalent for SEC ) asked Grant Thornton, the hearer of Bonlat, which held a bank history with Bank of America where all Euros 3.95 billion of Parmalat ‘s group hard currency was purportedly deposited, to look into whether Parmalat ‘s statement refering the bank history was true. Bank of America replied that the papers corroborating the bank history was a counterfeit and Parmalat ne’er had the money.


The cardinal component in this instance is the straight-out counterfeit of a missive stating that the dairy company had $ 4.9 billion in sedimentation with the Bank of America. This fraudulence was committed by the finance manager of Parmalat. A papers with Bank of America letterhead was scanned and so added to a papers verifying a sedimentation history with the bank. This fraud was done on behalf of the organisation.

Factors taking to the commitment of the frauds

There are many factors which facilitated the commitment of assorted frauds in the Parmalat instance. They are

Lack of internal control systems

Loopholes in the Italian Corporate and Securities jurisprudence

Concentrated ownership of the organisation

Lack of corporate administration Torahs

Affiliations between managers and proprietors

Independent board member ‘s deficiency of expertness in finance and hazard direction

Corrupted webs with statutory hearers and

The investing Bankss engaged by the company to put hazardous debt securities among retail investors.

Significant Parallel between Enron and Parmalat

The US famously had Enron and Italy had Parmalat. The Parmalat dirt is regarded as Italy ‘s Enron, though the harm caused by the Parmalat dirt was more black than Enron in USA. The Parmalat dirt cost Italy 1 % of its GDP. In the Financial Times ‘ sentiment ( Charles Pretzlik, Dec. 21 2003 ) “ the dimensions of the bankruptcy of Enron for the American economic system comparing to the bankruptcy of Parmalat ‘s were peanuts. ”

Although the impact of these dirts on comparative economic systems was different, the two bankruptcies have many elements in common.

Falsified Fiscal Statements

Both Enron and Parmalat gave the visual aspect of fiscal strength and stableness which was n’t the world. Both of them presented falsified fiscal statements to conceal their rise debts and fund their hereafter investings.

The Offshore Companies

Enron and Parmalat have both copiously used companies off-shore to avoid paying revenue enhancements, to conceal tremendous passiveness ‘s, to lead on the directives of the Antitrust. In other words, give an image of company in changeless growing of dimensions and charge.

To accomplish these aims, Enron created about two 1000s concealed companies. They represented around 45 per centum of the sum of the concern activities. Eonia, the SPE that was accused of concealing the existent state of affairs of Enron was able to clean a great portion of the Group liability through complex derived functions constructions.

In the same manner, Parmalat created a complex cyberspace of companies. The Camfield, an SPE constituted in Singapore, was the one reportedly providing pulverization milk to Cuba for approximately a‚¬10 million, when, in world, it was a pure fiscal innovation built on the base of false paperss that allowed to raise a immense budget. Bonlat, a entirely owned subordinate, was to account for a‚¬3.95 billion.

Cayman- The Caribbean safe

It has become really celebrated with Parmalat instance, but the Cayman ‘s islands are the most used “ revenue enhancement Eden ” by the international companies and by the direction of Enron. The islands are the 5th universe fiscal centre and there are 629 Bankss. In the files of the Chamber of Commerce of the Cayman there are the budgets and the secrets of 60,411 companies. Enron entirely has constituted about 692 companies. Parmalat, on its side, based here the Bonlat Financing Corporation, the centre of all the book-keeping secrets of the financials of Parmalat and the Fund Epicurum, unknown entity before November 10 which Parmalat ab initio claimed to be an investing fund in which it had invested a‚¬529 million before it was discovered that it was really a creative activity of Parmalat itself.

Optimism of the Analysts

Up to few hebdomads before the failure, the analysts believed that the industrial and fiscal world of Parmalat justified the monetary value of a‚¬3 for portion. Citigroup announced on the 12 November of 2003 that it has even improved its evaluation on Parmalat conveying from “ to keep ” to “ to purchase ” .

Sell-side analysts have received considerable unfavorable judgment for neglecting to supply an earlier warning of jobs at Enron. On October 31, 2001, merely two months before the company filed for bankruptcy, the average analyst recommendation listed on First Call ( which compiles and distributes analyst recommendations ) for Enron was 1.9 out of 5, where 1 is a “ strong bargain ” and 5 is a “ sell. ” Even after the accounting jobs had been announced in October 2001, reputable establishments such as Lehman Brothers, UBS Warburg and Merrill Lynch issued “ strong bargain ” or “ purchase ” recommendations for Enron.

Superficiality of the evaluation bureaus

The optimism of evaluation ‘s bureaus is a invariable of the worse clefts. The chief bureaus of evaluation declassed Enron and Parmalat to the degree of debris from investing class merely a few yearss before or even after the declaration of bankruptcy.

Relationship with Political Powers

One line of probe was whether the several authorities functionaries were cognizant of Parmalat ‘s & A ; Enron ‘s problems. Could they have acted to protect the involvements of the stockholders, creditors and workers? In both the instances, the companies top functionaries did hold some affiliations with the authorities.

Kenneth Lay, CEO of Enron was believed to hold influence over the Bush disposal ‘s energy policy. The fact that Lay and Enron had been some of the largest givers to Bush and his Republican Party did non travel undetected. Enron and its executives and managers, harmonizing to the Centre for Public Integrity, had given Bush US $ 623,000 since 1993. Lay, every bit good as a mate of George Bush senior, had backed Bush junior of all time since his unsuccessful command for Congress in 1978.

In the Parmalat instance, Mr. Tanzi became really good known for his Catholic passion and his political connexions with Christian Democrats leaders. In peculiar, he was considered to be a close friend of Ciriaco De Mita, the powerful leader of the opinion Christian Democrat party during the1980 ‘s.

Corporate Governance and ordinance

Parmalat is a reflecting illustration to day of the month for corporate administration maltreatments. By and large, Italian corporations both listed and unlisted, are owned by a little figure of stockholders. These stockholders are frequently related by household ties or stockholders ‘ understandings, and are able to exercise their power over the corporation if they want to.

The primary job of corporate administration in Continental Europe and in most of the universe is different. There, few listed companies are widely held. Alternatively, the typical house in stock exchanges around the universe has a dominant stockholder, normally an person or a household, who controls the bulk of ballots. Often, the commanding stockholder exercisings control without having a big fraction of the hard currency flow rights by utilizing pyramidic ownership, stockholder understandings, and double categories of portions ( La Porta, Lopez-de-Silanes, and Shleifer, 1999 ) .

These differences in ownership construction have two obvious effects for corporate administration, as surveyed in Morck, Wolfenzon, and Yeung ( 2005 ) . On the one manus, dominant stockholders have both the inducement and the power to train direction. On the other manus, concentrated ownership can make conditions for a new bureau job, because the involvements of commanding and minority stockholders are non aligned.

Family-controlled houses are non ever better governed than widely held 1s. Family control does assist to protect stockholders ‘ involvement against managerial maltreatments, since the commanding proprietor and the director are frequently the same individual. Furthermore, the commanding household is likely to perpetrate more human capital to the house and to care more about its long-term value ( Bertrand and Schoar, 2006 ) . However, households like directors in a widely held company, can mistreat their power and utilize corporate resources to their ain advantage. When this happens in a family-controlled house, things are even worse than in a widely held company, because commanding households can non be ousted through a hostile coup d’etat or replaced by the board of managers or by the stockholders ‘ meeting.

Self-dealing or tunneling is the transportation of value from houses where the commanding stockholder owns a little fraction of the cash-flow rights ( lower down in the pyramid ) to houses where the commanding stockholder owns a big fraction of cash-flow rights ( higher up in the pyramid ) ( Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000 ) . Value can be transferred in many ways: related-party minutess ( minutess with the dominant stockholder, a manager, or parties associated with them ) at other than arm’s-length footings ; the colored allotment of intangible assets and liabilities ; inordinate manager compensation ; and others.

In Parmalat, the commanding stockholders expropriated corporate resources via self-dealing.

Legislative Measures

After the Parmalat prostration several legislative steps have been taken to guarantee that history does non reiterate itself. Some of them are:

Strengthening Internal Governance Mechanisms

Several reforms have strengthened internal administration mechanisms by necessitating that executive managers on a regular basis inform the board of managers and the board of hearers of concern developments and related-party minutess, and most significantly, that at least one manager and one board-of-auditors member be elected by minority stockholders. The reforms besides entrusted the board of hearers with greater powers and slightly tightened their members ‘ independency demands.

In its 2003 corporate jurisprudence reform, Italy revised its antecedently slack government on self-dealing minutess. Directors now have to unwrap to the whole board and to the board of hearers any direct or indirect involvement they might hold in a dealing. Prior board-of-directors blessing is required for minutess in which the head executive officer has an involvement. While interested managers need non abstain from vote, the board declaration must adequately explicate the grounds for the dealing and the benefits deducing to the company. This compulsory justification of the dealing ‘s equity has to be more elaborate and analytical when the corporation decides for it under the influence of its parent company.

Empowering Stockholders

Italian companies ‘ stockholders once had to lodge their portions with a bank five yearss prior to the meeting, which prevented them from selling their portions during those five yearss and hence badly discouraged vote, particularly by institutional investors. In 2003 this proviso was repealed ; the default regulation is now no sedimentation duty, although company bylaws may necessitate an up to two-day sedimentation duty.

Enhancing Disclosure Requirements

In Europe, major revelation reforms have been enacted, that chiefly cover four domains

Corporate administration

Self covering and insider trading


Fiscal coverage.

Companies must declare whether they comply with the stock exchange corporate administration codification.

Tougher public enforcement

Italy has restructured and strengthened their public enforcement. It has tightened public enforcement over fiscal and scrutinizing. Italy has besides granted CONSOB greater powers. It besides provides for condemnable countenances in instances of market maltreatment.

Apart from the above mentioned stairss I believe there are assorted steps that should be undertaken for the future protection of stockholders and community.

Rulemaking is non the lone reply to corporate error. It is necessary to make a civilization that encourages a more ethical attack and wagess responsible behaviour.

Regulation, in reaction to fiscal fraud, can do making concern more expensive and slash corporations and markets efficiency.

Constructing a civilization of good administration might be a cheaper and more effectual agencies of contending fraud. If chances for fraud are to be reduced, it is necessary to shut the loopholes, cut down inordinate trust on finance and as professionals, find the bravery to talk out if all is non as it should be. The recent frauds portion common failures of administration caused by the separation of ownership and control in big corporations. The house ‘s nominal proprietors, the stockholders, exercising virtually no control over the daily operations of the company. Alternatively, control is vested in the custodies of professional directors.

The short-run position taken by some investors can move as an inducement to direction looking for quick-fix fiscal solutions to industrial jobs. In Parmalat ‘s instance the board of managers was composed of nine executives out of 13 members. And the company ‘s three independent managers were either close friends of main executive officer Calisto Tanzi, or members of the boards of Bankss making concern with Parmalat.

Investors can assist better fiscal markets by taking a more long-run position, systematically exerting their rights and honoring companies with good corporate administration. Regulation and enforcement can non be the lone reply. Corporations can take voluntary stairss to present better corporate administration criterions. These steps would cut down the hazard of fiscal frauds and direct a message to investors and stakeholders.