Corporate Failures: a Case of Pamalat

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M.SC. Accounting
January 2011

This paper focuses on the directors’ and accountant's behaviour and their contribution to Parmalat's fraud. It will also address how these gaps might be filled, and meanwhile propose some "solutions." First, we offer a brief description of Parmalat's group and of the events which forced the company to reveal its financial status. This will help to highlight a number of violations carried out by the directors and those who had the duty of controlling and watching over Parmalat, including the independent directors, accountants and the auditors. The atmosphere of laxity amongst the financial analysts, the rating agencies and the banks (as creditors, brokers, dealers, etc.), allowed Callisto Tanzi, the founder and the chairman of the group, and the other managers to perpetrate the fraud which eventually resulted in Corporate Collapse of Parmalat. The paper will not discuss on those areas.

Parmalat was the largest Italian food company and the fourth largest in Europe, controlling 50% of the Italian market in milk and milk-derivative products. Suddenly, it was discovered that it’s claimed liquidity of 4 billion euro did not exist, and that EU 8 million in bonds of investors' money had evaporated as well. Parmalat became the largest bankruptcy in European history, representing 1.5% of Italian GNP—proportionally larger than the combined ratio of the Enron and WorldCom bankruptcies to the U.S. GNP.

Early history (1961–2002)
In 1961, Calisto Tanzi, a 22-year old college dropout, opened a small pasteurisation plant in Parma. Four decades later, the company had grown into a multinational corporation diversifying into milk, dairy, beverage, bakery, and other product lines in the 1980s, becoming listed on the Milan stock exchange in 1990, and expanding further in the 1990s. By 22 April 2002, Parmalat's share price had reached a record and the company was valued at €3.7bn, employing over 30,000 people in 30 countries. The company began to expand and had listed in its portfolio amongst other things: an expansion in the space of a decade from six countries into thirty and ownership or sponsorship of various chosen ventures like Parma A. C. and Odeon TV.

The story began in 1997, when Parmalat decided to become a "global player" and started a campaign of international acquisitions, especially in North and South America, financed through debt. Soon, Parmalat became the third largest cookie-maker in the United States. But such acquisitions, instead of bringing in profits, started, no later than 2001, to bring in red figures. While losing money on its productive activities, the company shifted more and more to the high-flying world of derivatives and other speculative enterprises.

Parmalat's founder and then former CEO Calisto Tanzi engaged the firm in several exotic enterprises, such as a tourism agency called Parmatour, and the purchase of the local soccer club Parma. Huge sums were poured into these two enterprises, which were losses from the very beginning. It had been reported that Parmatour, now closed, had a loss of at least EU 2 billion, an incredibly high figure for a tourist agency.

While accumulating losses, and with debts to the banks, Parmalat started to build a network of offshore mail-box companies, which were used to conceal losses, through a mirror-game which made them appear as assets or liquidity, while the company started to issue bonds in order to collect money. The security for such bonds was provided by the alleged liquidity represented by the offshore schemes.

The largest bond placers have been Bank of America, Citicorp, and J.P. Morgan. These banks, like their European and Italian partners, rated Parmalat bonds as sound financial paper, when they knew, or should have known, that they were worth nothing. While Bank of America had...
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