PART 1. Parmalat Scandal Review2
1.5 End Results4
PART 2. Diagnosis of the underlying problems5
2.1. Internal governance failure5
2.1.1. Ownership and control structure5
2.1.2 Oversight function7
2.2. External gatekeeper failure9
2.2.1. External auditor failure9
2.2.2. Failure of the banking industry11
PART 3. Environmental thrust12
3.1. Italian traits12
3.1.1 Transitional capital market12
3.1.2. Immature corporate governance infrastructure13
3.2. Structural factors in auditing14
PART 4. Implications15
4.1 Internal control15
4.2 External supervision15
PART 5. Conclusion17
Parmalat of Italy, once a global leading diary giant, declared bankruptcy in late 2003 when its massive fraud came to the spotlight, reminiscent of earlier disgraceful corporate perpetrators like Enron, WorldCom and Tyco (Chen, Zheng and Zhuo, 2004). Starting with a meticulous account of the case-specific facts, this report then attempts to shed light on the host of issues, both at micro and macro level, which collectively contributed to Parmalat’s demise. The report will end with a set of constructive recommendations, pressing for enhanced efforts in promoting more robust corporate internal control, sounder regulatory and supervisory infrastructure and more disciplined external gatekeeping intermediaries.
PART 1. Parmalat Scandal Review
The crisis became public in November 2003 when questions were raised by Deloitte & Touche about transactions and burst out in the December. Detailed timeline is shown in the Table 1.
In this section, Parmalat scandal is analysed based on CRIME model, namely through five interactive fraud factors: cooks, recipes, incentives, monitoring and end results (Rezaee, 2002).
Source: Buchanan and Yang (2005); Jay and Tran (2004)
Source: Chen, Zheng and Zhuo (2004); Boomer Consulting, Inc. (2010); Buchanan and Yang (2005); Immordino and Pagano (2007); Ferrarini and Giudici, (2005); McCahery and Vermeulem (2005)
Conceal operating losses and costs
* Economic depression in Latin and South American markets (accounting for over 30% of group total sales): suffering shrinking demand and loss incurred from foreign currency depreciation (Chen, Zheng and Zhuo; 2004).
* To Finance its aggressive and acquisition strategy: over 70 acquisitions during 1994-2003; costs €5.4 billion for unprofitable acquisitions (Buchanan and Yang, 2005).
Conceal persistent misappropriation of corporate resources
* Exploited by Tanzi family for private advantages: €2.3 billion for financial transformations (ibid)
Monitoring in this fraud is the poor corporate governance with characteristics of unsupervised top management, highly-concentrated ownership, insufficient auditing mechanism and poor legal protection of individual investors (Melis, 2005a). Detailed discussion will be presented in the sequent sections.
1.5 End Results
* Parmalat had debts of 14.3bn euros, eight times what it claimed in 2003. The firm was then restructured by Enrico Bondi with government permission. The Top under Arrest:
* 16 charged including CEO Tanzi, CFO Fausto Tonna, and Luciano Del Soldato Auditing Firm:
* Two officials from accountant Grant Thornton's Italian arm were arrested. * On 8 January 2004, accountants Grant Thornton expelled their Italian partner firm Victims:
* 36 thousands employees whose jobs were in danger
* Milk suppliers waiting for payment
* Both large and small investors losing money
Lawsuit: Parmalat attempted to seek recovery from third parties that caused the collapse. * July 2004, against Citigroup
* August 2004, against Deloitte & Touche and Grant Thornton. * October 2005, against Bank of America for $10 billion...