Parmalat Violations of Sarbanes-Oxley Act

Topics: Internal control, Enron, Auditing Pages: 9 (1767 words) Published: September 19, 2014
Violations of Sarbanes-Oxley Act
Parmalat is a European company, and it’s headquarter is in Italy. The US Security and Exchange Commission still targeted Parmalat with fraud charge after the Parmalat fraud was revealed on Dec, 2003 (Kapner, D.W., 2003). The US SEC caught the chance to practice its law in a long range when Parmalat sponsored a program called American Depositary Receipts in the US to raise money since August 1996. The SEC stated that Parmalat sold their bonds to American investors while presenting untrue financial statements. The SEC also claimed that American investors had been cheated by Parmalat and purchased Parmalat’s note and bond totaling in dollar value of 1.5 billion by the time Parmalat was bankrupted. The SEC said that the ADR program was also affected by Parmalat’s misleading data, and the SEC has the right to protect American investors’ interest. This explains how the SEC is involved in the case of Parmalat fraud.

The Sarbanes-Oxley Act of 2002 was the legal weapon used by the SEC to charge against Parmalat. There are many scenarios within the Parmalat case that violates the Sarbanes-Oxley Act. The following section will explain in detail how Parmalat violates the Sarbanes-Oxley Act. Violation One

The former CEO and founder, Calisto Tanzi, admitted that he and the top managers forged and cooked Parmalat’s account for over a decade (Galloni, Reilly, & Reilly, 2003). The CEO and their top managers who are the relatives of the CEO decided to start some special purpose entities to cover the debt and lose of Parmalat. Those SPEs covers billions debt for a decade long and was not covered by auditors. Parmalat offered falsified financial statement for the public investors. All these actions were trying to mislead that Parmalat was making profit so the price of stock won’t fall. Parmalat was also issuing debt during the years when it was actually losing money. This action violated the following section of Sarbanes-Oxley Act:

“SEC.302.Corporate Responsibility for financial reports.
(a)(1) the signing officer has reviewed the report;
(2)based on the officer’s knowledge, the reports does not contain any untrue statement of a material fact” (Sarbanes-Oxley Act of 2002, 2002).
It’s clear that both Calisto Tanzi and other officers intended to use falsified financial statements to induce investors to invest on Parmalat. There was also no internal control at all at Parmalat. The members of board of directors in the company are mostly Calisto Tanzi’s family members, who did not care how the company was running. This also violates the following section:

“SEC.302.Corporate Responsibility for financial reports.
(4)the signing officers—
(A)are responsible for establishing and maintaining internal control;
(B)have designed such internal controls to ensure that material information” (Sarbanes-Oxley Act of 2002, 2002).
The family controlled the board of directors, and therefore the family controlled the company. There was no internal control or corporate governance. Calisto Tanzi even refused the request that some shareholders want to become the member of audit committee, which led to more suspicious thoughts for the company’s financial statement. Violation Two

Special purposes entities are the tools that Parmalat used to conceal its sky-high debt. Creating offshore subsidiaries is another tool which was used for the same purpose. The subsidiaries didn’t even exist, but the company forged non-existed transactions to increase the cash flow and profit for Parmalat (McHugh, 2005). One most classic example is the falsified subsidiary company called Bonlat in Cuba. Parmalat claimed that Bonlat owed $767 million dollars of Parmalat. The whole things, including the company and transaction, were found out non-existence. Another 200 similar subsidiary companies are created to cover off-book transactions or to build a false public image by hiding loses in those non-existed companies. These...

References: Alessandra Galloni in Milan, Carrick Mollenkamp in Atlanta and Darren McDermott in, Hong Kong. (2003, Dec 29). A global journal report: Scandal at parmalat broadens; staff may have destroyed files. Wall Street Journal Retrieved from http://search.proquest.com/docview/398854445?accountid=7084
Alessandra Galloni in Milan, David Reilly in London and Michael Schroeder,in Washington. (2003, Dec 30). Leading the news: Parmalat founder admits involvement in fraud; SEC sues dairy company over $1.5 billion debt offer and an attempted buyout. Wall Street Journal Retrieved from http://search.proquest.com/docview/398956062?accountid=7084
Brooks and Dunn. (2012). Business and Professional Ethics for Directors, Executives and Accountants, 6th edition. South-western Cengage Learning.
David McHugh. “Parmalat’s scandal not very clever.” Seattle Times, January 20, 2004, http://seattletimes.nwsource.com/html/businesstechnology/2001839930_parmalat200.html (accessed November 16, 2005).
F. Kapner. “Parmalat’s Account 999 Points a Finger at Deloitte,” Financial Post, April 12, 2004, FP16.
Fred Kapner and, D. W. (2003, Dec 31). SEC targets italian food giant with fraudcharges: Regulator says parmalat debt sales hinged on false data, by david wells andFred kapner. Financial Times Retrieved from http://search.proquest.com/docview/249516571?accountid=7084
Navigant Consulting, Canadian Institute of Chartered Accountants, and the American Institute of Certified Public Accountants, “Milk Gone Bad,” Report on Fraud 6, no. 5, 6, March 2004.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Sarbanes Oxley Act Essay
  • Sarbanes Oxley Act 2002 Essay
  • Sarbanes-Oxley Act of 2002 Essay
  • Sarbanes Oxley Act Essay
  • Sarbanes-Oxley Act of 202 Essay
  • Sarbanes-Oxley Act of 2002 Essay
  • The Sarbanes–Oxley Act Essay
  • Sarbanes Oxley Act Essay

Become a StudyMode Member

Sign Up - It's Free