Acct 574 Case Study 1

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THE PARMALAT SCANDAL

The Parmalat situation started out as a fairly standard – although sizeable –accounting fraud. Not even the best auditors could prepare for what was to come from this company. The Parmalat group, a world leader in the dairy food business, collapsed and entered bankruptcy protection in December 2003 after acknowledging massive holes in its financial statements. This happened when billions of euros seem to have gone missing from the company’s accounts. This dramatic collapse has led to the questioning of the soundness of accounting and financial reporting standards as well as of the Italian corporate governance system. Parmalat, which is headquartered in the central Italian city of Parma, was, like most Italian firms, launched as a family business. Under the direction of Calisto Tanzi, the capofamiglia, he began expanding the business shortly after his father’s death in 1961, transforming it from a small sausage and cheese shop into an international food and beverage concern. In a world where your network is your net worth, he formed close relationships with the Christian Democrats, who governed Italy throughout the postwar period. Today Parmalat is a leading producer of such items as pasteurized milk, cheese, yogurt, cookies, juice and iced tea, most of which are sold under a variety of names in different countries. Well-known names in North America include Archway and Mother’s cookies, Olivina margarine, Black Diamond and Balderson’s cheeses, and Astro yogurt. After such a description one may think that the company is very successful but this was only the beginning.

In 1999, Parmalat set up a subsidiary in the Cayman Islands called Bonlat. The first indication of financial problems came in early 2003 as the company tried to sell 500 million euro in bonds. After this CFO Fausto Tonna resigned in March replaced by Alberto Ferraris. The crisis became public in November as the Parmalat Scandal and the company went into...
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