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Parmalat Finanziaria SpA, an Italian food giant started out as a family business
specializing in dairy products. It was founded in 1961 by Calisto Tanzi, a 22 year-old
college dropout and Italian food industry heir. The company was named for Parma (the
food valley in Italian) and lat (an abbreviation of latte, Italian for milk). The eighties was
a period of further expansion: Parmalat consolidated its position as a world leader in the
dairy market and extended into other food markets, such as bakery products, tomato
sauces, fruit juices.

Parmalat's major innovation allowed it to produce the first shelf-stable milk through an
Ultra Heat Treatment (UHT) process developed in Sweden, enabling processors to
produce milk that could be stored for long periods without refrigeration. The product was
a hit, benefiting from its associations with and advertising through sports, including
Formula One Racing and Alpine Ski Championships. Parmalat was a European pioneer
in brand advertising.

Sales rapidly expanded throughout Europe, Latin America and, in total, in over 30
countries. The firm rapidly grew into a family empire, the largest food company in Italy,
the fourth largest food company in Europe, with over 36,000 employees in 139 plants
and branching into a variety of industries including beverages, television, tourism,
cookies and football.

In 1997, Parmalat initiated an aggressive campaign to acquire other firms, particularly in

the Americas. One of its large purchases in 1997 was Beatrice Foods, a large U.S.
producer. Many of these acquisitions were huge money losers. Most of the acquisitions
were financed with debt and the firm's debt ratings gradually deteriorated. Nonetheless,
Parmalat appeared to be a good citizen to many Italians, donating to Catholic causes
and rebuilding a cathedral in Parma. By 2002, the firm had grown to realize 13 billion in


Cayman Island Issue

Bank of America Issue

Liquidity Issue

Destroying Evidence Issue

Local Govt Issue

Peculiarities of Italian Business Environment (Family Inherited) and Things were kept in
trusted circle.

Role of Auditors questioned


In 1997, Parmalat jumped into the world of financial markets in a big way, financing several
international acquisitions with debt. But by 2001, many of the new divisions were producing losses,
and the company financing shifted largely to the use of derivatives, apparently at least in part with
the intention of hiding the extent of its losses and debt.

In February 2003, chief financial officer Fausto Tonna unexpectedly announced a new 500 million
bond issue. This came as a surprise both to the markets and to the CEO, Calisto Tanzi. Tanzi forced
Tonna to resign and replaced him with Alberto Ferraris. Ferraris was surprised to discover that,
though now CFO, he still did not have access to some of the corporate books, which were being
handled by chief accounting officer Luciano Del Soldato. He began making some inquiries and
began to suspect that the company's total debt was more than double that on the balance sheet .


The plan for a 300M fundraising effort was dropped in September 2003 and the
company's shares depreciated significantly.

Ferraris resigned less than a week after the public fall-out and was replaced by Del
Soldato. Del Soldato resigned the next month, unable to get cash from Epicurum fund,
needed to pay debts and make bond payments totalling at least 150M, a seemingly
small sum given Parmalats size and prominence.

Tanzi initially attributed the default to a temporary liquidity problem, blaming it on a

customer, a speculative fund named Epicurum. Parmalat claimed that Epicurum did not
pay its bills.

It was later revealed that Epicurum was one of Parmalat's own offshore subsidiaries.
The rating agencies quickly downgraded Parmalat's bonds to junk status.

Bank of Americas Fake account

Enrico Bondi was called in to help the company as it went into administration,
while Tanzi himself resigned as chairman and CEO.
Bonlat was a subsidiary of Parmalat set up in the Cayman Islands. Bonlat's
bank, Bank of America, then released a document showing 3.95 billion in
Parmalat's bank account as a forgery. Parmalat confirmed that it simply did not
Prime Minister Silvio Berlusconi initiated a fraud investigation and appointed
Bondi to administer the company's rescue. Hundreds of thousands of investors
lost their money and would never recover it.
About a week later, Tanzi, who admitted to taking over 500 million for himself
and his other businesses, was jailed . Two Italian-based executives of
Parmalat's former auditing firm, Grant Thornton S.p.A., were also held and
questioned in Italian jails.


On December 24, 2003, Parmalat S.p.A. filed for bankruptcy protection with a court in Parma
Italy, the largest bankruptcy in European history. Since December 2003, Parmalat has been
enmeshed in, and apparently emerging from the aftermath of the largest financial fraud in
European history, with approximately 14 billion having apparently simply vanished. Much of
this loss seems to be related to Parmalat's debt level being over 14 billion, almost eight
times what had been reported before the firms unraveling.
For years, Parmalat hid its losses, overstated its assets, recorded non-existent assets,
understated its debt and diverted cash to Tanzi family members. The firm created over 260
foreign entities such as Bonlat, its Cayman Islands subsidiary to dump its non-performing and
fictitious assets and to hide its debts. Interestingly, much of the fraud went undetected for as
long as 13 years.
Parmalat's business interests were far-flung, extending into travel and sports businesses and
well beyond the areas of competence of its founder and his family

Parmalat hid losses, overstated assets or recorded non-existent assets, understated its debt,
and diverted company cash to Tanzi family members.

In order to hide losses, Parmalat had used various wholly-owned entities, amongst which
the most significant was Bonlat, the Cayman island waste basket of the Group in its final
5 years, and the holder of the Bank of Americas false account.

Uncollectible receivables were transferred from the operating companies to these

nominee entities, where their real value was hidden.

Fictitious trades and financial transactions were organized to offset losses of

operating subsidiaries and to inflate assets and incomes.

Securitization schemes based on false trade receivables and duplicate invoices were
recurrently used to finance the group.

Parmalat understated its debt through

different fraudulent schemes. It recorded non-existent repurchases of bonds.

It sold receivables falsely described as non recourse, in order to remove the

liabilities from the records.

It mischaracterized debt or, simply, did not record it.

Funds were diverted to Tanzi family members and their private companies.

A recurrent scheme was to record the payments as receivables and then move the
false receivables through the

web of the offshore entities in order to blur their true nature.


After Parmalat filed for bankruptcy protection, court administrators hired turn-around
specialist Enrico Bondi to reorganize the firm. Bondi immediately began to trim down
Parmalat to focus on its core dairy business.

A number of its non-core subsidiaries such as its football teams were spun off as well as
operations in Latin America, Thailand and Ireland and several poorly-performing brands
were eliminated.

Bondi set out to streamline the corporation's operations to 16 milk and juice-based
businesses around the world and 30 of its stronger global and regional brands, including
Bonlat milk, Santal juices and Kyr yogurt, a substantial reduction from its 120 brands
under Tanzi.

Prior to its re-emergence from bankruptcy, Parmalat creditors agreed to swap about 20
billion of the firm's debt for equity, earnings began to resurface and the firm soon relisted
its shares on the Italian Stock Exchange in Milan.

Parmalat remerged from bankruptcy and Bondi's appointment to remain as CEO

afterwards was approved by the firm's new shareholders.

Bondi also began to seek billions of euro in compensation from a number of banks that
may have participated in Parmalat's meltdown, alleging they colluded to hide Parmalat's

Bondi charged that several banks provided assistance in creating false financial
statements and profited from floating bond issues that delayed disclosures of Parmalat's
financial problems.

Among the banks defending themselves against these charges were Deutsche Bank for
(at least 17million), UBS (290 million) and Citigroup (over 8 billion).

In addition, Parmalat sued its auditors Deloitte & Touche and Grant Thornton for
approximately 20 billion, though they claimed to be victims of Parmalat's fraud.


This episode also reveals the shoddy role of some well-known international banks such as
Citigroup and UBS. The laxity of big banks and financial institutions to lend unsecured
loans to Parmalat had negative repercussions

Banks and financial institutions were so busy in making money through their dealings with
Parmalat without considering long term consequences.

In the same vein, credit ratings gave higher ratings to Parmalat without adequately
examining its financial data.


Bank of America $274 million

Citigroup $242 million

Capitalia 614 million Euro

UBS 420 million Euro

Banca Intesa 360 million Euro

Banca Monte dei Paschi di Siena 183 million Euro

Unicredito 150 million Euro

Banca Nazionale del Lavoro 110 million Euro

Banca Popolare di Lodi 100 million Euro

Banca Popolari Unite 100 million Euro

ABN Amro 70 million Euro

Credem 50 million Euro

Banca Lombarda 35 million Euro

Banco Popolare di Verona e Novara 35 million Euro

Barclays 45 million


Parmalat lacked board independence.

Parmalat is family owned company of Tanzi and Sons, Tanzi is the founder and chaiman
and CEO of the company.

Parmalat was also weak on the composition of key board committees.

Parmalat does not sufficient no. of independent director as per the SOX.

Both audit committee and remuneration committee is completely dependent on Tanzi



The responsibility of both chairman and CEO is not different.

The holding company controls majority of voting rights which ultimately belongs to the
Tanzi family.

Wrong disclosure of financial report. The company was facing debt which is more than
double what was disclosed in financial report.

As per SOX, board should have more 50% independent director. But in Parmalat, the
board was composed of 3 independent director remaining are executive director out of
which only one is independent director.

Lack of monitoring company operation by the board of directors.

Parmalat had 3 internal auditors which were appointed by company and neither of them
appointed by minority shareholder in order to protect their rights.

Lack of rotation of external auditor, as per Italy corporate governance external auditor
should be rotated after 3 years


Founder, Chairman and CEO: Calisto Tanzi

No role distinction between CEO and Chairman.

Without understanding the company financial condition acquired

many companies in the food industry which resulted in financial

Manipulate financial report by hiding losses

Diverted 500 million euro from company reserve to

Parmatour(which belongs to his daughter) without taking
approval from shareholder and stakeholder.

CFO: Fausto Tonna

Completely dependent on the company internal auditor, not even access company books
which was handled by internal auditor

Announced a bond issue of 500 million euro, without communicating shareholder,

stakeholder and other personals.

Independent directors:

Being independent director of the company. They did not question the company

Internal Auditor

Manipulation of balance sheet by reducing debt to half, in order to give company better financial picture.

In order to cover losses, post profit by representing that company involved in aggressive acquisition .

External Auditor:

Lorenz Penca of Grant Thornton auditor firm, remained chief auditor for 9 years, even Italian government
have role of rotation after 3 years.

Not an independent director as related to one the company subsidiary.

Also involved in company fraud and laundering activities.

Company has nonexistent account in Bank of America. Grant Thornton claimed that this account is existent
in order to show third party confirmation.

Senior management:

Not perform efficiently to minimize the risk of company and did not question activities of Executive Director.

Executive Directors:

company had 7 executive directors, all of them equally involved in company malpractice. They also received
compensation for their involvement.

Institutional investors:

Not find the company actual financial condition and invest 150 million euro.

Help the company to go public, raised fund from the market.

Bank of America, Citigroup and J.P. Morgan:

Largest bond placers helping Parmalat to fake balance sheet and hide their actual financial

Bank of America give higher rating to Parmalat bonds based on the fake account which never

Citigroup and J.P.Morgan help Parmalat to build a fraudulent accounting practice

Deloitte and Toushe: Auditing firms

Even after rotation of external auditor in 3 years, agreed to continue Lorenz Prenca to be chief
auditor of the company.

Allow Parmalat to follow wrong accounting practice and help them to cover fraud.

Regulators were also responsible as they not able to detect pattern of negligence and fraud.

Separately, Italian prosecutors sought trials for 27 people. Eleven of those, including three of
Parmalat's former chief financial officers, were sentenced to up to two and a half years in prison under
plea bargains, while a separate trial began in January for two accountants who worked at Grant

Many of the defendants were spared prison terms by Italian sentencing guidelines protecting first-time
offenders. Prosecutors in Parma, near the company's headquarters, sought to try Tanzi and dozens of
others on trial for more serious charges, including fraudulent bankruptcy and criminal association.
Alessandro Bassi, a 32-year-old accountant who worked under CFO Tonna, committed suicide by
throwing himself off a bridge near the company's headquarters in northern Italy.


The Parmalat scandal has been described by the SEC as one of largest and most brazen
corporate financial frauds in history. The Parmalat case epitomizes the most important
problem , a controlling shareholder that exploits the company rather than monitoring its
managers. Parmalats governance structure was openly deficient.

In spite of this deficiency, Parmalat enjoyed an investment grade credit rating and was
able to borrow increasing amounts of capital from investors.

Two large networks of auditors (Grant Thornton International and Deloitte Touche
Tohmatsu) failed to detect the frauds. Grant Thorntons Italian partners are also suspected
of having orchestrated them.

Some first-ranking international banks allegedly assisted Parmalat senior managers in

structuring and executing complex financial transactions aimed at concealing Parmalats
true situation.


In the wake of the Parmalat scandal, Consob (government authority of Italy responsible for
regulating the Italian securities market) launched a wide-ranging investigation concerning bond

Listed companies were required to provide additional information, auditors adopted a stricter
approach and some cases of insolvency were probably accelerated.

The effect of the Parmalat scam on the bond market has been quite significant. According to a
report from Fitch Ratings, the number of Italian companies accessing the bond market

Other companies turned their attention back to the loan market.


One of the impacts this scandal created was a slump in the firm's stock market (1.8
billion before the scandal) - shares became almost worthless and a face value of just 20%
was allotted for its bonds. This sharp drop and the failure of the company in repayments
led to a lower rating by S&P (Standard & Poor).

Various parties were affected -the employees across various countries who lost their jobs,
Brazilian and Australian dairy farmers not paid for the delivered milk and investors. In
2005, Parmalat was restructured and relisted under Milan Stock Exchange after its
various businesses was valued at 2.95 billion and market capitalization at 5 billion.

To determine the flourishing companies, the foremost change was restructuring the
governmental oversights of corporations to promote corporate transparency. Further a
bureau was created to monitor the Italian financial markets.

Italy formed watchdog groups which were earlier formed by the US Public Company
Accounting Oversight Board after scandals like Enron, WorldCom etc. Some other
practices introduced is the pronouncements made by auditors on the internal accounting
practises of their respective firms named Basle II and a capital adequacy rule that
determines capital adequacy that shifts to credit risk keeping in mind the numerous
financial disasters in the last 15 years.

The fact that Parmalat is a global consumer brand is one of the reasons for the scandal
being dramatic and labelled Europe's Enron. This scandal has also been labelled as one
of the most corporate financial frauds in history. Further it wiped out 135,000 people's
savings making it one of the largest financial frauds in history. For a period of time the
firm's financial systems totally eluded the analysts' understanding as the company's
results weren't very transparent and the true extent of its liabilities were difficult to


Today, Parmalat has a global presence, having operations in Europe, Latin America, North
America, Australia, China and South Africa. Since 2011, it is a subsidiary of French
group Lactalis.

Still specializing in UHT milk and milk derivatives (varieties of yogurt, cheese, butter, ice
cream, etc.), the group also has an interest in fruit juices. These products are distributed
under brand names such as Lactis, Santal, Mal, and Kyr. Its worldwide operations
include almost 140 production centres and more than 36,000 employees, while 5,000
Italian dairy farms are dependent on the company for the bulk of their business. Its shares
are listed on the Borsa Italiana.


in blue directed presence, in green presence under license


The Parmalat situation started out as a fairly standard - if stunningly large - accounting fraud.
Managers allegedly used various accounting tricks to avoid disclosing sizeable losses, possibly
with the collusion of some auditors and lawyers.

The presence of a strong controlling shareholder(CEO Tanzi) introduces a new divergence of

interest. In fact, it is very easy for the controlling shareholder to extract non-pro rata benefits for
itself at the expense of the minority shareholders and futhermore stakeholders.

The Parmalat scandal raises the well known gatekeepers problem with respect to auditors,
lawyers and financial intermediaries. It also confirmed the low level of law enforcement in Italy.
The problem is that there was no serious effort to reshape the enforcement system.

The key of the discussion is on transparent accounting rules. Once this is achieved it will
be much easier to solve the problem of enforcement.

Accounting Frauds will be with us al long as there are unscrupulous businessmen and
dishonest or incompetent lawyers and auditors.

Cost-effective system of better accounting rules and responsible enforcement that strives
only to reduce the problem to manageable proportions.