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Parmalat Accounting Scandal | Summary

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The Parmalat Accounting Scandal

1. What were the events leading up to the Parmalat accounting scandal and ultimately the revelation of the accounting fraud and the reasons behind the scandal?

Evolving from a small dairy shop into an international concern, Parmalat appeared to be a gigantic and stable dairy producer. At some point in time, it may well have been gigantic and stable, but in December 2003, shocking news was broken to Parma, Italy, and the world at large. Parmalat was no longer a success as it once may have been, and it was bankrupt, and had been bankrupt for several years without this ugly truth being exposed. The truth had apparently been concealed due to a number of people being at least somewhat aware that something was amiss with transactions on the books, but had not spoken out. Through the years that Parmalat was going bankrupt, there were several events that took place before Parmalat’s condition was finally exposed. To begin with, as early as 1990, there were signs that Parmalat was in debt. In accordance with what has been uncovered, Parmalat’s fraudulent activities are said to have ‘taken off’ in 1990. This was when their stock went public, and reflected the need for a big company like Parmalat to perform in the international market so that their performance improved and met investor expectation (Family Arrests in Parmalat Scandal, 2004).

The following year [1991] the Tanzis purchased Parma Football Club of which Tanzi's son, Stefano, was president, and also was Parmalat board member. With this purchase, the football club rose to fame quickly, but faced large losses that recorded a deficit of over €77m in 2002. According to investigations, Parma Football Club was the first asset to be sold[1].

Another set of purchases that went along with purchasing the Parma Football Club included Tanzi buying up his competitors. Once he had established Parmalat Milk in the global market, his financial ventures proved to be devastating. This included his family’s financial interest in football and tourism, as well as his failed attempt to outdo Belosconi when he purchased a TV network, Odeon TV. At this point, Parmalat’s finances were a mess.

Purchasing Odeon TV Network was a disaster as Tanzi had to sell the network off for a around £30m. From this point on though, it is said that Parmalat still progressed in spite of its major losses. This was largely achieved through altering the books and attaining bank loans and investments against falsified figures.

Parmalat had spent €130 million on Odeon TV, but it collapsed within 3 years. In order to prevent bankruptcy at this point, Parmalat had to sell itself to a company that was already listed on the Milan stock exchange. This helped to produce €150 million from external investors, and paved the way for Parmalat to be in public view in 1990. It also enabled them to patch up some of its accounts[2].

It is thought that Parmalat began altering its books in 1993. If Parmalat had not ‘cooked’ its books it would have registered financial losses every year. However, they registered profits, which meant that they would still be viewed as a viable organization and one that was worth investing in. Therefore, they managed to avoid being suspected of any losses and attracted much investment.

Parmalat managed to cover losses through a combination of fictitious transactions and aggressive acquisition. This commenced in 1992, when Parmalat started ‘snapping up’ various companies in Argentina, Italy, Brazil, Hungary and the U.S. However, beyond 1995 it is thought that Parmalat was not able to fund its own needs. Yet it managed to prove to investors that it was registering significant profits. Perhaps, Parmalat’s profits registered were so convincing that the Bank of America alone, in 1997, provided $1.7 billion through bonds and private placements for U.S. investors. It also received $30 million or more as payments and commissions[3].

One of the main events that lead up to the Parmalat accounting scandal exposure includes the company changing its external auditor. In accordance with Italian law, an external auditor can be changed once in 9 years. So, in 1999, Parmalat, in accordance with Italian law replaced Grant Thornton with DeLoitte and Touche.

Grant Thornton was keen to keep working with Parmalat, which was a high profile company, as it would be good for their reputation still being developed. Therefore, they recommended that Parmalat spin off its travel and other businesses, and permit these to be under them [Grant Thornton]. Such an arrangement would be convenient to both Parmalat itself and Grant Thornton. Through such an arrangement Parmalat could then satisfy its new external auditors [DeLoitte and Touche] with Grant Thornton making illicit payments to Parmalat. This was made possible through the executives at Parmalat creating debts, and Grant Thornton creating false accounts from which Parmalat could be paid. Grant Thornton would then produce these records to DeLoitte and Touche who saw little wrong with them.

Numerous reports reinforce that Grant Thornton was aware of the ‘shell games’ that Parmalat was playing. One example of these games includes case of “cooking the books,” that reports the Cayman Islands subsidiary Bonlat claiming to have sold a large quantity of powdered milk in a span of one year to Cuba. It claimed that this quantity was sufficient to produce 55 gallons of milk for every individual on that island.

Another interesting event that lead up to Parmalat’s exposure of the accounting scandal was that Grant Thornton and Deloitte & Touche signed off on its increasingly surreal accounts. In return, it is said that they booked millions of dollars (Parmalat Scandal Deepens…, 2006).

In Parmalat's final weeks, Deutsche Bank had taken on helping it work with Standard & Poor's, hardly ten days before the exposure. Around this time, analysts around the world kept encouraging investors to continue purchasing its stocks and bonds.

In 1999, finance director Alberto Ferraris laid out a financing scheme. He managed this through a Delaware company known as Buconero. This was the Italian for "black hole," that Citigroup established for Parmalat in 1999[4]. This company loaned out $137 million to a Swiss subsidiary of Parmalat. From here, the money was transferred to Parmalat companies. In return for Buconero’s service to Parmalat, it received a return of around 6%, in addition to $7 million in payments for Citigroup. Just like Parmalat made use of Buconero, it also used other offshore companies to dress up its debt till the time of its exposure[5].

Back in 1995, Parmalat also commenced concealing its debt through shell companies. It had been losing $300 million annually in Latin America, and decided to wipe this debt off the company's financial records. It managed to do so by using 3 shell companies situated in the Caribbean.

The huge debt patchwork through the 90s began to raise concern by the end of the decade. Esteban Pedro Villar, expressed concern and filed an "early warning report" (Gumbel, 2004). This was regarding Parmalat's Latin American set-ups. He had so many questions that his concerns were termed as "offensive and ridiculous” (Gumbel, 2004). Then suspiciously, Deloitte's Parmalat business in Argentina was terminated. In response, Deloitte was silenced, and the accounts were certified.

In addition to the above concern that was demonstrated by a Deloitte partner in Latin America, there were others. On March 28th, 2003, Deloitte's Maltese office raised questions regarding a $7 billion intercompany transfer they suspected was fictitious. Wanderley Olivetti, the Deloitte auditor in Brazil, raised such concern at the Milan office regarding Parmalat's Brazilian accounts that the matter went straight to Deloitte's chief executive in New York City at that time, Jim Copeland. However, Olivetti's objections were mysteriously ignored and he was soon removed from dealing with the Parmalat account. Deloitte claims it behaved within its rights to remove any employee it wishes to, and this may be done for a number of reasons. It also said that the investigation of Parmalat started in October 2003, after Deloitte Italy had drawn attention to Parmalat's financial dealings[6].

Following the suspicions raised by auditors, Epicurum was established in an attempt to show that Parmalat was due considerable amounts of money. However, this attempt to erase debt from the records at Parmalat failed, and the company admitted that it could not retrieve the amount they were due from Epicurum.

One of the key events that led to the exposure of Parmalat includes Tanzi and his son’s meeting with private equity firm Blackstone Group in New York. Tanzi and his son Stefano, one of the main executives at many of the family’s concerns, met with the Blackstone Group to discuss the sale of 51 percent of the family’s share in the food empire. It was in the course of conversation regarding preparation for the books to be opened to a transition team from Blackstone, that Tanzi and his son slipped out with the fact that the cash on hand was less than the 3 billion Euros registered in the company’s annual report. In addition to this, they revealed that there were barely any liquid assets. They even further stated that the company was in debt of about 10 billion Euros.

In addition to the suspicion that was brought against Parmalat through observations of its faulty accounting records, it is this final attempt to sell of 51 percent of family shares that marks the end of the road for Parmalat’s long trail of fraud.

The following facts presented date-wise are interesting to note as they map the path that Parmalat took since its inception till its end on 13th December 2003:

  • 1961 Parmalat was founded by 22-year-old Calisto Tanzi. It was established as a small family food business that pasteurised and sold milk
  • 1963 Parmalat introduces Tetrapak for packaging its ‘long-life’ milk products.
  • 1980s Parmalat starts producing fruit juice, biscuits and ready-made sauce.
  • 1990 Parmalat is listed on the Milan stock exchange.
  • Through the 1990s Parmalat grows after flotation. It then reaches into America, Brazil, few South American countries, and Eastern Europe and Australia. Tanzi aims at expanding a television network to outdo tycoon Prime Minister Silvio Berlusconi. However, his Odeon television foray flops and costs Parmalat £30m. Parmalat products also get sale in 20 countries.
  • 1999 Parmalat‘s Bonlat subsidiary is established in the Cayman Islands.
  • 2003
  • 11 November Crisis escalates when shares are hit after auditors raise questions regarding accounting of transactions with mutual fund Epicurum [a Cayman-based company linked to Parmalat].
  • 15 November Alberto Ferraris resigns from the position of Finance director.
  • 8 December Parmalat admits failure to recover €496.5m from Epicurum. This amount was needed to service debt.
  • 15 December Tanzi resigns as chairman and CEO.
  • 16 December Enrico Bondi takes control of the company.
  • 17 December Bank of America denies the credibility of documents that affirm Bonlat account existence.
  • 24 December Parmalat files for irregular administration operations.
  • 27 December Italian authorities hold Tanzi in their custody in Milan [7]
  • 29 December Tanzi admits to siphoning off €500m of company funds; Bondi takes charge as Parmalat administrator; US Securities and Exchange Commission bring charges against Parmalat for fraud.
  • 30 December Tanzi is formally charged with fraud.
  • 31 December Parmalat officials are arrested. These included former CFO Fausto Tonna and Luciano Del Soldato, and two officials from Grant Thornton's Italian branch that audited Bonlat.

2. How was fraud perpetrated and how was the company able to continue with the fraudulent practice for such a long time?

Parmalat started out as many other businesses have. It was first a small dairy shop that slowly progressed and expanded its range of products, and finally turned into a large dairy producer that sold its products in several countries. From the early 1990s and onwards, Parmalat appeared to make significant progress, registering profits annually that was encouraging enough for investors to go on investing in the company. However, the truth of the matter was that these very investors were all being deceived due to Parmalat’s fraudulent practices largely perpetrated by Tanzi, top managers, the Parmalat's external lawyer, Gian Paolo Zini, and two external auditors, Maurizio Bianchi and Lorenzo Penca. However, Zini, Bianchi and Penca claim that they are innocent[8].

Falsifying Credibility and Obtaining Loans and Investments:

Tanzi and all those who were allegedly involved in what is known to be one of the biggest scams, managed to borrow money from banks and even justified these loans for Parmalat through inflating revenues and fictitious sales in records between 1990 and 2003. They would also ‘cook’ its books in order to make debt vanish. They managed to do this through transferring debt to offshore ‘shell’ companies. In addition to covering up debt in this manner, there were other tactics that Parmalat resorted to (Parmalat Dream Goes Sour, 2004).

One of the other methods Parmalat used in order to cover their debt when it got too big to cover with the offshore shell companies included their invention of a bogus milk producer, supposedly situated in Singapore. Parmalat claimed that the company had supplied 300, 000 tons of milk powder to Cuba. This process included Bonlat, a Caymen Island subsidiary of Parmalat. Bonlat had a fictitious account in the Bank of America. This whole setup is so surprising that it has left many baffled as to how could such a fraudulent concept have been so successful and convincing when there was no concrete evidence in it[9].

Looking at the above example of the manner in which Parmalat faked transactions, it can be observed that the whole concept is such that it would have an ordinary person believe that it was authentic. Who would have suspected that any of it was fictitious, particularly because Parmalat had been a company in operation for several years? Ordinarily, one would suspect a company if it had a single concern that was being publicized. However, since Parmalat was projecting trade being conducted that included different physical points, there was little suspicion raised. There was the exporter in Singapore, the importer in Cuba, and Bonlat involved too in the Caymen Islands. The scheme thought up was very believable also because of the fact that Bonlat supposedly had an account in the Bank of America.

Different Roles Played to Conceal Debt:

Considering the debt that was actually showing up in the books, Parmalat had to have people who could cover it up well enough. This called for people on the inside as well as the outside to co-operate. External auditors, internal auditors as well as the top-notch individuals at Parmalat had to play their roles. One the inside, the books were maintained in the hands of trusted people. External auditors were told to keep this quiet. In this case, it was chiefly Grant Thornton that aided Parmalat in carrying out its fraudulent practice for so long.

Grant Thornton’s Role:

Grant Thornton played a major role in helping Parmalat continue its long-term fraudulent practice. It did so because it had a great deal to gain from Parmalat, and so did Parmalat have a lot to gain from Grant Thornton working with them.

Grant Thornton was and up and coming auditing firm that needed to be have sound clients in order to help its reputation in the market. Parmalat paid Grant Thornton considerable amounts to conceal debts. Quite obviously, this seemed to work for several years, and did so till 1999, when Parmalat were compelled to replace Grant Thornton with DeLoitte and Touche. This was necessary because by Italian law, an external auditor should be changed every nine years. Parmalat abided by the law, but was also proposed a way of continuing its fraudulent practice.

With DeLoitte and Touche taking charge as external auditors meant that debts would no longer be concealed, and Parmalat could be exposed. This could have happened in 1999. However, since Parmalat maintained Grant Thornton for its spin offs [its travel and other businesses], they were able to continue tricking everyone far and wide. This scheme was simple as well, and included another series of false records in order to show that Parmalat was still making profits annually. This was possible through illicit payments that these spin offs could make to Parmalat. Executives at Parmalat would create debts while Grant Thornton would create false accounts from which they could make payments to Parmalat. They would produce these records to DeLoitte and Touche, and they would be approved[10].

More Actions that helped to Conceal Parmalat’s Debt:

Basically, it could be asserted that it was the executives on the inside of Parmalat and the external auditors that were hand in glove; together they managed to conceal debt. However, in addition to this practice that lasted for many years, the innovative idea of offshore concerns enhanced credibility. In addition to this, the fact that Parmalat products were popular in several countries meant that fewer questions would be asked. Also, for a whole decade none of the auditors in any location raised any concerns. It is thought that the amount concealed by 1995 amounted to $300 million annually in just Latin America. By this time, debt was already enormous and it is obvious that a great deal was being done to conceal it well enough. However, since Parmalat’s increasing debt went unnoticed for a few more years, it is obvious that more action needed to be taken in order to make sure that it stayed covered. This meant that Parmalat had to transfer debt off its financial statements. In order to do this, it had to make use of ‘shell’ companies in the Caribbean. These companies had to show sales, and Parmalat would send them fictitious invoices in order to legitimize the sales. Parmalat would then make out notes to banks in order to show them that they were owed so much finance. Against these notes, Parmalat would be granted loans, as it appeared that the Parmalat was making profits. In order to make their debts disappear, Parmalat transferred its debts to its offshore subsidiaries that were based in tax havens (Parmalat Dream Goes Sour, 2004).

The Beginning of the End:

Parmalat had been making use of offshore shell companies until 1999. Parmalat shifted operations of its three offshore shell companies to Bonlat, in the Cayman Islands in 1999. This is thought to be the beginning of the end for Parmalat. At this point, debt was so high that it was becoming difficult to conceal it. Fictitious assets at Bonlat amounted to around $8 billion, which forced Parmalat to create a Cayman Islands-based investment fund, Epicurum, which would take over part of the fictitious credit. It was Epicurum that caught auditors’ attention as well as Italy's stock market regulator [November 2003]. It was just a matter of a month before everything was exposed and the company officially was declared bankrupt[11].

Finally, it may be asserted that it was the auditors through which Parmalat managed to deceive everyone for so long with the help of top-level management at Parmalat. If Parmalat had not been able to get Grant Thornton to work in their favor along with their internal auditors and top-level management, the entire scam would not have been possible. This dates back to the beginning of the fraud when Parmalat first began to conceal its debt. If it did not have an external auditor on its side to conceal the large debt it incurred because family business and unnecessary purchases, Parmalat’s debt would have been in public view in the early 1990s. However, this was not to be due to a ring of people working to conceal debt. Though there were several people involved in making debt disappear off the records, it can be observed that it was the auditors that made each of Parmalat’s fraudulent schemes possible. This is true to say whether one looks at the debt covered in the earliest days of fraud or towards the end. The fictitious transactions with shell companies too were made possible due to the auditors who ‘cooked’ the books. However, it can also be asserted that the auditors were not solely to blame in making sure this fraud lasted for so long, as there had to be others in on these schemes too. This included key people of Parmalat such as the executives, its CEO, its internal auditors as well as external auditors and individuals at key financial institutions. In order for a fraudulent scheme to last as long as it did in the case of Parmalat, there had to be a whole ring of people involved, which also explains why it took such a long time and deep investigation to uncover all those were responsible for the scandal.

3. The role and the responsibility of auditors in preventing financial scandals and ensuring and upholding the principles of good corporate governance.

In organizations such as Parmalat and other large organizations where there are several shareholders and many people dependent on the progress of these corporations, executives and top-level managers have a responsibility towards them. Generally, it can be asserted that corporate governance refers to ways in which rights and responsibilities are shared between various corporate participants, the management and the stakeholders[12]. Governing corporations such as Parmalat consists of fixed processes, customs, policies, laws and institutions that impact the way it is directed and administered. These are processes that should have been conducted responsibly in order to make sure that Parmalat made progress. If Parmalat was facing debt, executives and all those concerned should have been honest and made sure that these debts were made known (Gumbel, 2004). This would have saved the organization in its earliest days of trouble. Therefore, it can be asserted that being honest and responsible in corporate governance is important.

It is important to assert that corporate governance also encompasses the relationships among the many participants involved in the process (the stakeholders) as well as the goals for which the corporation is managed or governed. The principal participants are the shareholders, management and the board of directors. In addition to these main players there are other stakeholders: employees, suppliers, customers, banks and other lenders, regulators, the environment and the even community[13]. This is because all these people and institutions are affected in one way of another by the actions and repercussions of a corporation and the decisions it makes.

In view of the many people that corporate governance impacts as in the case of Parmalat, accountability, fiduciary duty and mechanisms of auditing and control are of immense importance.

Responsibility of Auditors:

Auditors, whether they are external or internal auditors, have responsibility towards all those involved with a corporation. Particularly, it may be asserted that there are many individuals who are not directly involved with the operations of a corporation, but they may be dependent on its operations significantly. These are the kinds of people that really need to be protected, and auditors have a great responsibility towards them (Gunz and McCutcheon, 1996, 7-15).

To begin with, a very basic and generally stated duty of auditors is to make sure that a corporation’s operate efficiently, their records are maintained properly, and its taxes are handed in on time. Auditors generally offer these services to their clients, which include government, public and management accounting. In offering these services, their role includes preparing reports, analyzing, and verifying financial statements and documents for the purpose of providing information to their clients. By performing these tasks honestly and not concealing any information auditors fulfill their duties (Gunz and McCutcheon, 1996, 7-15). This is precisely what is required of them when they deal with huge corporations like Parmalat. The role of auditors would include exposing whether the corporation is actually making huge annual profits or whether they are concealing their debts[14].

In addition to the roles that auditors play in offering their services to corporations, other services they provide include financial and investment planning, budget analysis, information technology consultation, and limited legal services. However, these are services can only be carried out if they perform their fundamental duties responsibly. This is because the figurers that they provide after performing their fundamental tasks impact these additional processes. For example, if debts of a corporation are not presented accurately and annual profits are fictitious, how can an authentic and realistic budget be prepared? Therefore, it can be asserted that auditors cannot work and produce any realistic figures if they distort debts and profits made annually. In recent times, this is what has been occurring. Corporations hire auditors to check their statements. Somehow, these auditors have gotten involved in illegal behavior and have hidden debts and elevated profits. Based on these figures they helped in painting pretty pictures for the corporation’s reputation in the market. This is how Parmalat managed to remain in the global market for a long time without being suspected of having immense debt.

Having asserted the above, it is also important to consider the fact that in the US there are limitations imposed on auditors that investigate a corporation’s financial statements. Due to the fact that there have been corporate scandals that have involved auditors being involved, it is now illegal for an accounting firm that audits a corporation’s financial statements, to advise areas such as investment banking, legal matters, etc. of that firm. One exception to this prohibition is that auditors may provide advice on tax issues that would benefit the company (Young, 1997).

Forensic Auditing:

Having asserted the necessity of making accurate reports of financial figures regarding a corporation’s annual budgets or debts, it must be asserted that one major and specialized accounting practice is forensic accounting. Several public accountants specialize in this, as it is of growing importance in today’s world where corporate scandals appear to occur frequently.

Forensic accounting includes investigation and interpretation of white-collar crimes. This type of crime includes bankruptcies, securities fraud and embezzlement, and contract disputes. In addition to this, criminal financial transactions, such as money laundering, are also included in white-color crime. It can be asserted that auditors who specialize in forensic accountancy play an important role in preventing corporate scandals such as the one that took place with Parmalat. However, it should be remembered that auditors who do not specialize in forensic accountancy are no novices. This means that if there are any unusual entries and irregularities in records, any auditor should be to detect them, and this is why all auditors are said to have responsibility to report any irregularities[15].

Though auditors generally are able to detect any irregularities, those that specialize in forensic accounting make use of accounting and finance knowledge, law and investigative techniques. They use this combination in order to detect illegal activity in a corporation, and it is obviously a greater advantage to them as they are more specialized.

It is known that there are several forensic accountants that work in tandem with personnel from law enforcement departments during investigations. However, this occurs normally after a corporate scandal has been detected. Considering this, it might be a good idea for forensic accountants to work in this manner as part of regular and standard procedure in order to safeguard everyone involved with a corporation. If such a practice were adopted as standard procedure, it would become more difficult for financial scandals to take place. This is considerate of acknowledging that corporations usually appoint their own auditors. Auditing firms might be required to adhere to practices that would make regular procedures more thorough and transparent as a result[16].

Aside from considerations for current practices of audit firms and ones that could be included in order to prevent financial scandals, the general concept of internal and external auditors reviewing and analyzing financial statements of firms aims at doing the same thing.

Fundamental Responsibilities of Auditors:

It is the primary responsibility of internal auditors to make sure records are accurately maintained. These records are also checked for any form of irregularity, which may include things like mismanagement or even fraud.

Internal auditors are not only supposed to maintain records of financial figures, but their roles also encompass examining the firm’s operations with regard to finance and information systems, management, and internal controls. Examining these operations are important as they help to make sure that financial records are accurately maintained. In addition to this, these steps also examine the adequacy of controls to protect the firm against financial scandals (Gunz and McCutcheon, 1996, 7-15).

Further, it can be asserted that internal auditors have the responsibility of evaluating important areas of the corporation such as effectiveness, compliance with all standards and corporate policies and procedures, efficiency, laws, and government regulations.

Since there are so many types of operations to take care of in a corporation, there are areas of specialization for internal auditors as well. Some of these may include environmental, engineering, electronic data-processing, legal, insurance premium, banking, and healthcare auditors.

The reason for specialization in these areas is because there are technical procedures that need to be understood in order to evaluate things like efficiency and effectiveness. Having deeper understanding of individual industries helps internal auditors to evaluate a corporation’s operations more specifically (Bavly, 1999, 25-30).

Among the important steps that internal auditors may take towards better controls within a corporation, recommendation of better controls is high on the list of priorities for better auditing processes. An example of recommendations that internal auditors may make in a firm, internal auditors may help managers through computer systems. This is because computers aid in timelier information. Therefore, internal auditors may aid managers to take decisions using data as opposed to using observational methods. Internal auditors may also suggest controls for a firm’s computer system if they believe these recommendations would enhance reliability with producing data for more accurate decision-making (Young, 1997).

Considering all the steps that internal auditors may take for better tracking and accountability, external auditors also have their roles to perform. External auditors have their responsibilities as well, and they need to be sure of all that internal auditors do is in accordance with accounting rules as well as with the law (Young, 1997). The roles of external auditors are not easy, as they have to dig into the records to evaluate how a firm has been progressing. They also need to observe the way that operations are managed. Physical checks are also necessary, and these are often conducted and matched with what the financial statements say. External auditors may seek reasons when they find particular records with irregularities. They have the authority to inquire about the smallest details of a firm until they are satisfied with what they see (Gunz and McCutcheon, 1996, 7-15).

Generally, the role of internal auditors is to make sure that everything is recorded, as it should be. Internal auditors are supposed to be responsible for their entries and should not conceal debt. If there is debt on the records, it has to be shown so that when external auditors check the financial statements they know that the records are authentic. As opposed to this, if internal auditors conceal debt, external auditors may find out about it and report the financial statements to concerned authorities (Fleming & Mancino, 1997, 25-30).

In the case of Parmalat, it was observed that external auditors were involved with concealing debt. Therefore, nothing was ever reported for many years. In such a case, it can be observed that internal as well as external auditors were working hand in glove along with executives within the firm. This resulted in a complete cover up for debt and the records were further manipulated in order to depict huge annual profits. When such situations do arise, the reputation of the external auditors also exposed (Fleming & Mancino, 1997, 25-30). In Parmalat’s case, the external auditing firm that was chiefly responsible for concealing debts was Grant Thornton, and it turns out that they did not have a grand reputation in the market. They were in need of Parmalat’s big name while they also gained through receiving high payments of fees from Parmalat for keeping the lid on their books. With such occurrences, some experts assert that there is need for an audit committee to supervise internal as well external audits (Braiotta, 2004, 33-45).

In order to control fraudulent practices and financial scandals, it is thought that an audit committee is an appropriate measure. This is because a committee of this kind has the authority to assess the effectiveness of a firm’s operations such as risk management, compliance systems, and internal control. The main reason why the audit committee has autonomy and authority is because the Chief Executive Officer and the Chief Financial Officer are not members of it. Since the committee is independent, it may assess how appropriate a firm’s accounting policies and principles are. The management of the firm provides information about the firm’s compliance framework to it (Bavly, 1999, 25-30). Through this information, the audit committee can review and evaluate management operations that are conducted to guarantee compliance with standard accounting practices, laws, and regulations that pertain to external reporting (Braiotta, 2004, 33-45). In addition to this information, external and internal auditors provide their assessments to the committee. In view of all the information presented to it, the audit committee can make its recommendations where necessary in the firm. In short, the audit committee has a considerable amount of authority and reliability, and this is because it is independent of particular members of the organization such as CEO and top-level management that have often been involved in scandals with corporations (Gunz and McCutcheon, 1996, 7-15).

4. Your view as to whether Parmalat auditors were free from blame?

Having studied Parmalat’s condition from the late 1980s till December 2003, it is difficult to say who is NOT to blame in the process, aside from the 36400 employees that were in non-managerial positions, as well as the stakeholders and all those outside the firm who thought Parmalat was doing well. Initially, it had been sketchy as to who was to blame for the fraud, but as the case unfolded it became increasingly clear who all were involved. Indeed, the extent of the fraudulent involvement extended into territory beyond Italy. This was because of the fact that false documents in other locations were also used[17]. Considering this and the fact that the fraud had taken place over a considerable length of time meant that there had to be a significant number of people involved[18].

Given that auditors have an immense responsibility towards corporations, they should detect the occurrence of fraudulent actions. Auditors are responsible for detecting whether or not there are irregularities in financial statements. This is because of the fact that they have access to all necessary records (Bavly, 1999, 25-30). However, in Parmalat particular records were not easily available easily and were maintained with particular top-level managers.

Since there are two sets of auditors operating together, internal as well as external auditors, nothing should go unnoticed. While internal auditors have the authority to record financial movements in the firm and make necessary recommendations for better procedures, external auditors have the responsibility of checking the manner in which records have been maintained, and whether there have been any irregularities. In other words, it may be asserted that external auditors check all the actions of the internal auditors and they should be able to determine how well they have maintained them (Bavly, 1999, 25-30). In Parmalat, this was not done. Generally, auditors should be able to seek logical answers from the internal auditors as well where necessary, and it is the duty of internal auditors to be able to provide these answers. In this way, all records maintained can be clearly understood.

Internal as well external auditors roles in Parmalat were supposed to be no different from any other firms. Yet, fraud took place, and these auditors are most likely to be blamed for such an occurrence. Of course, much of the blame certainly does lie with them for them overlooking irregularities in the records or having concealed debts.

When Parmalat’s illicit practices were unveiled, it became clear that there were several irregularities. These had not appeared recently on the books, but had existed for many years. Yet, no one said anything about. That is the first reason to say that the auditors were significantly to blame for the Parmalat scandal (Parmalat in Bankruptcy Protection, 2003).

Looking at Parmalat’s case a little closely will reveal that both, internal as well as external auditors, were involved in irregularities in financial statements. It is known that internal auditors were aware of what was going on because there were particular records that were assigned to certain members in the company. Some records that would have revealed debts on record were not allowed into hands that might have been really concerned. To be specific, this refers to what Ferraris said about his access to records[19]. He claims that there were particular records that he had not been given access to. He asserts that this is when he really got suspicious that something was wrong. Records that should have been easily available to auditors were difficult for him to get his hands on.

The point to focus on here is that if Ferraris was concerned in a short span of time with the firm’s financial records, how come the internal auditors were not concerned. Didn’t they suspect things the way that Ferraris did? Having asserted this, since debt was concealed for so long, it is obvious that internal auditors were aware that there were illegal practices going on with the records. This can be said because if there were transparency in the records why would particular records be maintained with individuals in the company who were not willing to reveal them. Internal auditors would need to have access to them as well. It is apparent that internal auditors either kept silent on their own or they were told to. With the top-management telling internal auditors how to handle procedures, it appears that internal auditors may have had little choice but to remain silent. It is also very likely that the top management had somehow informed internal auditors that the books would be looked after by Grant Thornton, the external auditing firm. This is the only way that irregularities in the records could be concealed.

Since there was an arrangement between Grant Thornton and Parmalat to ‘cook’ the books, it is even likely that the internal auditors played a smaller part in the rigging of records.

Grant Thornton had for a nine-year period played an immense role in rigging Parmalat’s financial records in order to hide debt. Since the early 1990s this appeared to be the case because it was around this time that Parmalat had actually began going into debt yet concealed it well. Undoubtedly, since these early days of Parmalat being in debt, it may have had its internal auditors concealing debt, but when these records were due for external audits, it is obvious that Grant Thornton handled them (Parmalat in Bankruptcy Protection, 2003).

Grant Thornton’s Role in Concealing Debt:

The relationship that Parmalat had with Grant Thornton was indeed one that was vital to Parmalat’s success as well as survival in the global market. This is because of the fact that the external auditors helped to conceal debts and also register significant profits that attracted investors. It appears that more than the internal auditors may have played a role in concealing Parmalat’s debt, Grant Thornton helped Parmalat to succeed even though it was sinking deeper and deeper in debt (Gumbel, 2004).

In addition to cooking the books at Parmalat, when Parmalat supposedly established offshore companies, it was Grant Thornton that again helped the firm look as though it was still making huge profits annually. Right up till 1999, Grant Thornton helped Parmalat show that they were making profits annually. However, in 1999, it looked as though this partnership would end, leaving Parmalat without an external auditor that could help them out. Grant Thornton also wanted to continue its association with Parmalat in order to bolster its market reputation, as Parmalat was viewed as a good firm to have worked with. So, when Deloitte & Touche replaced Grant Thornton, Parmalat agreed to keep Grant Thornton on its spin offs at locations offshore. This meant that Grant Thornton could go on acting in Parmalat’s favor by making illicit payments to Parmalat in order to show that Parmalat was making profits[20].

Certainly, it appears that the external auditors were doing a great deal in the process of concealing Parmalat debt. However, this does not mean that the internal auditors were being anywhere near honest in their work. The internal auditors would show that in their records Parmalat was due a lot from the offshore companies. This is how Parmalat made it look as though Parmalat was not in debt but was actually due a lot. Of course, this was with the advice of executives at Parmalat (Parmalat in Bankruptcy Protection, 2003).

In addition to this, internal auditors also appear to be responsible for the loans and investments that Parmalat gained against their fictitious profits. Therefore, it can be said that as a result of the internal auditors making it look like Parmalat was due payments it managed to attain loans and receive investments. It must be realized that Parmalat managed to do this even after Grant Thornton was no longer working closely with the firm (Gumbel, 2004). However, Grant Thornton’s efforts from the offshore companies appeared to be sufficient.

It must be further mentioned that when Parmalat’s debt got too big for it to be covered by the internal auditors as well as the external auditors, even bigger measures were taken to safeguard Parmalat. This included the fictitious sale of milk to Cuba. It is thought that the Bank of America was involved in this new scheme because it was simply not possible for an account to exist in the Bank of America for such illicit transactions without anyone in the bank knowing about it. This was perhaps the biggest of their schemes that Parmalat ever executed. However, the debt hole was way too big to be covered. In Latin America there was sufficient suspicion regarding the records, and few auditors began to voice their concerns. Parmalat tried to hush the issues, but it was only a matter of time before everything blew open (Parmalat in Bankruptcy Protection, 2003). At this point, it became difficult for any auditor to save Parmalat. The books had already been rigged far enough, and evidence was beginning to spill.

From the above brief discussion of fictitious transactions and records, it can be asserted that there were obviously several people involved in the Parmalat scandal. These included, internal as well as external auditors, executives in Parmalat, few key employees at Parmalat, and individuals from the Bank of America in addition to other institutions. This is why the internal as well as external auditors alone cannot be blamed. However, they are certainly guilty of fraudulent accounting practices. Perhaps if these practices were curtailed from the very beginning, Parmalat would never have gone far enough with its fraudulent ideas. It is evident that the internal as well external auditors are to blame for the Parmalat scandal, but they do not stand alone. While Grant Thornton are completely guilty of aiding Parmalat’s fraud, it is was Deloitte & Touche that revealed something was wrong with the records (Gumbel, 2004).

5. Your view on Parmalat's efforts to obstruct justice by destroying key evidence?

Parmalat had for so many years been respected for the manner in which it contributed to society. Tanzi, its chief, was a man greatly respected for the way he apparently brought Parmalat on to the world stage. However, it is worth asking whether Parmalat really did reach the world stage that people thought it did. Parmalat did not have enough revenue in it to really be valued as much as it was. It was a hollow firm that produced fictitious statements of annual profits, and it had managed to do so out of a situation that had sunken it in debt. This was the purchase and subsequent sale of Odeon TV network that Tanzi thought would outdo his competitor[21]. It was perhaps this particular situation through which Parmalat began projecting itself as a firm making huge profits annually. However, these statements about huge annual profits were false, and obstructed justice. It must be asserted here that destroying evidence does not only refer to doing away with physical forms of evidence, but it also includes concealing visible information that could be used against a firm like Parmalat. Therefore, even if there is a slight intended alteration made to records in a firm, it is considered as destroying evidence (Gumbel, 2004).

Fictitious Statements:

Producing false statements about making huge annual profits automatically means that Parmalat was concealing the truth and destroying evidence of debt. Years of this practice indeed made it tedious for investigators to dig into the books and unravel how much money went in directions it was not supposed to go. Also, the direction in which the money went was difficult to trace though Tanzi admitted to siphoning a large sum of it off to the family’s travel business. By concealing that he had channeled large amounts off, on the records, is an obstruction of justice (Gumbel, 2004).

In addition to the fictitious statements that were used in order to cover up for Tanzi misdirecting funds, the manner in which Odeon TV was sold coupled by Parmalat entering the stock exchange was in itself a way of destroying evidence. The truth is that they covered what was actually an outright loss. However, it appeared to have worked well, as evidence of debt was concealed and profits were registered. This is again another example of when Parmalat obstructed justice by destroying evidence. In addition to this, the more surprising part of this concealment was the fact that Parmalat used the situation to their advantage and were registered on the Milan Stock Exchange[22]. Not only did they obstruct justice, but they also deceived all traders and investors by doing so.

Through this, Parmalat managed to gain the attention of several investors whose money went nowhere but towards family business such as tourism (Family Arrests in Parmalat Scandal, 2004). While following sinking family business in this way, Tanzi led Parmalat to disaster by channeling funds that could have otherwise strengthened Parmalat. While channeling funds in this direction, Tanzi made sure that evidence was not left behind, and so did everything he could to make debt disappear of the records and show large annual profits. Certainly, this was an obstruction of justice, as no one could trace out where the money went. However, even auditors would not find out or reveal where any funds went, as they themselves were involved in making debts disappear.

Top-level employees in Parmalat were also in on the obstruction of justice, and therefore, it could be said that there was a full ring of players that worked together to erase any visible debt (Gumbel, 2004).

It must also be asserted here that the deception that Parmalat intentionally caused was unethical and against acceptable business behavior. It is worth considering how future business and investment would be affected for others in the country due to Parmalat’s irresponsible actions. Undoubtedly, many business people would be hesitant to invest in corporations in Italy. This is because if a supposedly trustworthy firm like Parmalat could deceive investors over such a lengthy period, it is possible for others to do the same there. This is also another reason why it can be said that Parmalat is guilty of destroying evidence. They destroyed evidence that otherwise would have revealed their true status, and thus prevented investors from being deceived. Parmalat did not consider that their actions could very well result in shattered investor confidence.

Participants of the Parmalat Scandal:

To begin with, it may be said that all participating individuals in Parmalat’s fraudulent activities obstructed justice. All those key members that concealed debt and recorded profits are all responsible for obstructing justice. Key members involved have been held responsible for the scandal. This is because of their orders that fraudulent activities were carried out. In saying this, it must be realized that there are also various conditions under which employees may have been compelled to act as ordered. There may be employees who desperately need to keep their jobs, and hence may be compelled to follow orders that are not right. This is why such employees cannot be blamed. It is the higher-ups that are largely to blame, and they are the ones that need to pay the price. In addition to this, it could be asserted that there may be a number of situations, which an employee is unaware of; s/he may not be aware of what s/he is doing because a higher-up just passes orders to perform a particular task without any reason. In such claims, it is difficult to determine whether or not the employee is to blame. However, as far as key personnel are concerned, the law does not tolerate excuses. This is why key individuals at Parmalat were arrested, as they were in the position to know what was going on for so long.

At the same time, it might be argued that these key individuals in the top-level of management at Parmalat alone cannot be blamed (Gumbel, 2004). It is worth considering that if these orders were not followed, the scandal would have come to light earlier. Auditors for instance could have refused to act as directed or even reported illegal orders. However, at the same time it can be argued that orders were simply being followed. Having said this, the question that still needs to be asked is regarding the auditing processes; if auditors are generally aware of their responsibilities in corporate governance why do they choose to follow orders and deceive thousands of people in the process? Don’t they know where limits lie? This perhaps leads one to think that auditors need to blow the whistle on such orders.

Shell Companies:

The use of shell companies was another means through which Parmalat managed to get rid of evidence. These offshore shell companies supposedly owed Parmalat money, and its records would show that it had a lot to its credit. Here again, it could be observed that it was through external auditors, Grant Thornton, that Parmalat managed to show fictitious profits. Also, it was with the help of executives and internal auditors in Parmalat that this was made possible (Gumbel, 2004).

Fictitious Sales:

In addition to the use of shell companies that Parmalat made use of in order to conceal its debts, it also saw the need for making up large fictitious sales. This occurred when the firm realized that debt figures were getting too big to conceal. They managed to make up false evidence of sales that were conducted between Singapore and Cuba (Gumbel, 2004). To an ordinary person now, it appears that such enormous sales figures of milk sold to Cuba look a bit odd. However, at that point in time, who would question Parmalat that had everyone believe that it was authentic. Here again, these fictitious sales were created in order to conceal debt that had gotten way to large for Parmalat to conceal. These fictitious sales served its purpose, but even then, debt kept growing, and Bonlat had to be accompanied by another new offshore company, Epicurum, to hide the largest debt figures the company had. This had perhaps been Parmalat‘s final attempt to conceal debt. After they could no longer conceal debt, they had to admit that they failed to recover €496.5m. This being Parmalat’s final attempt to destroy evidence of debt remained unsuccessful, and they had to admit to it[23].

Finally, it can be asserted that Parmalat was guilty of obstructing justice by destroying key evidence. They managed to carryout this in a number of ways, and indeed, a combination of their efforts was successful in concealing debt for so long. Since the early 1990s they concealed losses that the firm incurred through purchasing a TV network. After realizing the failure of this purchase, they managed to use the situation to their advantage and ended up on the Milan Stock Exchange. This allowed them to deceive investors over a period of time. Also, the establishment of shell companies further helped them to conceal debt as funds were continuously channeled to sinking family business. When this debt grew bigger and bigger, newer schemes were devised such large purchases that included Bonlat at Cuba. In addition to this, another company, Epicurum, was established to share some of the debt that Bonlat could not handle alone. These companies stood only to show that Parmalat was still making profits. All these schemes devised were done so in order to conceal Parmalat’s debt and were clearly a case of destroying evidence that is also obstruction of justice.

References:

Bavly, Dan A. Corporate Governance and Accountability : What Role for the Regulator, Director and Auditor? Greenwood Publishing Group, Incorporated. 1999, 25-30.

Braiotta, Louis. Audit Committee Handbook, John Wiley & Sons, Incorporated. 2004, 33-45

Corporate Governance: An International Review. July 2005. Volume 13 Page 478

Family arrests in Parmalat scandal. Tuesday, February 17, 2004. http://www.cnn.com/2004/BUSINESS/02/17/parmalat.ap/index.html

Fleming, P. D. & Mancino, J. The Auditor and Fraud. Journal article. Journal of Accountancy, Vol. 183, 1997, 25-30.

Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

Gunz, S., and J. McCutcheon, A New Perspective on the Audit, Journal of Law and Business, (Vol. 2, Dec. 1996), 7-15.

Parmalat Dream Goes Sour. The Observer, Sunday January 4, 2004. www.guardian.co.uk/Observer/ business/story/0,6903,1115471,00.html

Parmalat in Bankruptcy Protection. Wednesday, 24 December. 2003. http://newswww.bbc.net.uk/1/hi/business/3345735.stm

Parmalat Scandal Deepens; May Be Biggest Fraud Ever, from Citizen Works. Accessed on 28th March, 2006. http://www.unobserver.com/layout5.php?id=1327&blz=1

Young, J. Defining auditors' responsibilities. Accounting Historians Journal, The, Dec 1997. http://www.findarticles.com/p/articles/mi_qa3657/is_199712/ai_n8780367

1


[1] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[2] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[3] ibid

[4] Parmalat in Bankruptcy Protection. Wednesday, 24 December. 2003. http://newswww.bbc.net.uk/1/hi/business/3345735.stm

[5] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[6] ibid

[7] Gumbel, P. Parmalat Dream Goes Sour. The Observer, Sunday January 4, 2004. www.guardian.co.uk/Observer/ business/story/0,6903,1115471,00.html

[8] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[9] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[10] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[11] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[12] Corporate Governance. Accessed 28th March, 2006. www.corpgov.net/

[13] Corporate Governance: An International Review. July 2005. Volume 13 Page 478

[14] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[15] Bavly, Dan A. Corporate Governance and Accountability : What Role for the Regulator, Director and Auditor? Greenwood Publishing Group, Incorporated. 1999, 25-30.

[16] Bavly, Dan A. Corporate Governance and Accountability : What Role for the Regulator, Director and Auditor? Greenwood Publishing Group, Incorporated. 1999, 25-30.

[17] Parmalat in Bankruptcy Protection. Wednesday, 24 December. 2003. http://newswww.bbc.net.uk/1/hi/business/3345735.stm

[18] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004. http://www.time.com/time/europe/magazine/article/0,13005,901041129-785318,00.html

[19] Gumbel, P. How It All Went So Sour - The inside story of Parmalat; Time Magazine; November 23, 2004.


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