Parmalat Accounting Scandal
Parmalat Accounting Scandal
Summary
After eluding financial analysts and investors for a long time, Parmalat went bankrupt later in December, 2003 and many of their board of directors have been arrested since then. Here is a brief summary of the events: In the late 1980’s, Parmalat’s financial situation was poor due to investment in side businesses. i.e. TV network, Parmatur, football teams (Palmeiras, Parma, etc). Cash siphoning through these companies was estimated to be total of € 10 Bn. In 1990, Parmalat went public which enabled them to tap into the capital markets. Early 1990’s, the company began to acquire dairy producers around the world in order to try to hide the growing debt. Parmalat entered into a series of bond issuances and securitization of receivables to generate cash. A series of other fraudulent accounting practices occurred during the following years. In December 2003, Parmalat was not able to make a U$ 150MM bond payment and raised the attention of the entire market. When the fraud was brought up, Calisto Tanzi (Parmalat founder) and Fausto Tonna (CFO) was arrested along with another 10 individuals. Grant Thornton and Deloitte & Touché were Parmalat’s accounting firms during the last 2 decades. Partners of both firms were charged for fraudulent activity.
Case analysis From the analysis we made, there are several items that can be appointed as accounting principle violation:
A) Overstatement of Assets Assets Selling: Parmalat sold firms to private entities and individuals to re-buy it later in a fake operation, as the money came from other offshore entities just to create liquidity in the books; thanks to that, they could keep issuing bonds to cover their debts Accountable Receivables recognition: Double billing the Italian supermarkets and other retail customers Fake bank accounts: false document have been created to prove the existence of € 3,9 Bn cash at Bank of America. Again, with more liquidity, more easily got
Summary
After eluding financial analysts and investors for a long time, Parmalat went bankrupt later in December, 2003 and many of their board of directors have been arrested since then. Here is a brief summary of the events: In the late 1980’s, Parmalat’s financial situation was poor due to investment in side businesses. i.e. TV network, Parmatur, football teams (Palmeiras, Parma, etc). Cash siphoning through these companies was estimated to be total of € 10 Bn. In 1990, Parmalat went public which enabled them to tap into the capital markets. Early 1990’s, the company began to acquire dairy producers around the world in order to try to hide the growing debt. Parmalat entered into a series of bond issuances and securitization of receivables to generate cash. A series of other fraudulent accounting practices occurred during the following years. In December 2003, Parmalat was not able to make a U$ 150MM bond payment and raised the attention of the entire market. When the fraud was brought up, Calisto Tanzi (Parmalat founder) and Fausto Tonna (CFO) was arrested along with another 10 individuals. Grant Thornton and Deloitte & Touché were Parmalat’s accounting firms during the last 2 decades. Partners of both firms were charged for fraudulent activity.
Case analysis From the analysis we made, there are several items that can be appointed as accounting principle violation:
A) Overstatement of Assets Assets Selling: Parmalat sold firms to private entities and individuals to re-buy it later in a fake operation, as the money came from other offshore entities just to create liquidity in the books; thanks to that, they could keep issuing bonds to cover their debts Accountable Receivables recognition: Double billing the Italian supermarkets and other retail customers Fake bank accounts: false document have been created to prove the existence of € 3,9 Bn cash at Bank of America. Again, with more liquidity, more easily got