Holly Spirit University Of Kaslik

USEK-Business school

PARMALAT SCANDAL
PROJECT DONE BY : PAMELA MAHROUK

HEND MAALOUF

PRESENTED FOR : DR HADI SALIBA

Plan:
1. History and evolution

2. The beginning of Parmalat fraud

3. Problematic

4. Causal analysis ( causes and consequences)

5. Recommendations

6. Conclusion

7. References
1-Parmalat’s history and evolution
• The period of the old Parmalat which started in 1961 and ended in December 2003 with the outbreak of the financial
scandal.
• Parmalat was founded in 1961 as a family-run farm in Northern Italy. In the years that followed, the company grew into
one of the largest dairy and food companies in Italy and eventually became a multinational conglomerate.
• The company is best known for its revolutionary, ultra-high temperature (UHT) milk, which can sit unopened on an
unrefrigerated shelf for six or more months without spoiling or souring. Parmalat also produces, distributes, and markets
an ever-growing range of other food products, including dairy products, such as ice cream, yogurt, butter, and cheese;
fruit and tomato juices; vegetable soups and tomato sauce; and bakery products like snacks, biscuits, pastry, pizza, and
focaccias.
• In 1963 Parmalat was Born. Turning from a little family business to a Large company
• By 1966 those efforts resulted in what would become the company's signature product for decades to come: milk pasteurized
at ultra-high temperatures (UHT milk).
• Parmalat continued to grow in more ways than one. It acquired companies in Italy and abroad: Bonlat SRL in Mantova,
Dietelat SRL in Verona, and P. Paestum in Salerno; Molkerei Weissenhorn GmbH in Germany (1977); and Laiterie de
Carpiquet S.A. in France (1979)
• The company's range of products expanded to include cheeses (1974), desserts (1976), butter (1978), and UHT béchamel
sauce (1979).
• By 1990, Parmalat was already selling its products in more than 30 countries.
• By 1997, Parmalat consisted of 62 companies, 84 plants, and 14,000 employees in 22 countries. Sales reached almost $5

billion that year. Sixty percent of its revenue came from North and South America, with U.S. sales reaching $400 million.

• By the year 2000, Parmalat had spent $400 million to become the number 8 milk producer in the United States

• 2003 was the end of Parmalat’s empire due to a financial fraud

• Starting from December 2003, Parmalat and numerous other companies of the old Group are admitted to the

Extraordinary Administration procedures. During this period the Restructuring Plan of the Parmalat Group and the

Composition with Creditors, which was an integral part of the Plan, have been prepared. The Composition with Creditors

established a separate legal entity,

• The "new" Parmalat S.p.A., in which starting from October 1, 2005 are included 16 companies of the former Parmalat

Group.
Fraud’s Definition:
it’s a criminal deception intended to result in financial or personal gain.
Fraud occurs when someone gains something of value, usually money or property, from a
victim by knowingly making a misrepresentation of a matter of fact.
Act or course of deception, an intentional concealment, omission, or perversion of truth, to gain unlawful or unfair
advantage
Why Commit Fraud

Personal
Concerns

Performance Market
Concerns Why Concerns
Commit
Fraud

Legal Financing
Concerns Concerns
2-The beginning of Parmalat’s fraud:

Parmalat’s fraud began the way many frauds begin — as an attempt to cover up losses. In
1990, the company’s South American subsidiary began generating losses, which CEO
Calisto Tanzi chose to disguise in the company’s financial results. As happens in so many
frauds, Parmalat’s choice to commit fraud made the company path dependent, leading to
ever more unethical accounting conventions and self-dealing. The fraud was eventually
discovered in 2003, when Parmalat defaulted on a €150 million bond issue despite reporting
more than €4 billion in cash and equivalents on its balance sheet.
13 bil
lions
h ole in
P a r m al
at’s b
a l an c
e she
et
2-Problematic
Financial Scandal

Type Of fraud:
The base of Parmalat fraud was considered securities Fraud, and including the following methodes:

• Manipulation of Parmalat’s balance sheet; income statement through fictitious investment assets and sham transactions

• Falsifying Parmalat’s financial statements and portraying the company as strong as profitable,

• Raised capital on both sides of the atlantic, including billions of dollars of stocks and bonds sold of American

investors.

To have more details, balance sheet was incorrect because the company had not repurchased 2.9 billion Euro of

Parmalat’s bonds. So the bonds were falsly repurchased. On the other hand, Parmalat has no cash, it really had 500

million euro in cash, and later on Parmalat’s CFO presented data of debt 10 billion euro
• On November 2003, auditors had doubt about an investment of 500 millions euros, on same time Standard

and Poor’s agency lowered the notation of Parmalat’s actions. At this time, the operation commission at the

stock marked started asking how will Parmalat be able to pay it’s coming debt at the end of 2003.

• Parmalat announced a 3.95 billion euro as emergency deposit at Bank of America.

• Bank of America Replied with a denial of the existence of such amount, saying that the copy that was

presented by Parmalat was scanned and photoshoped.

Who was in charge ?
• Tanzi, Parmalat’s former CEO, Chairman of the board and membre of the boards executive committee, was able to loot

the company because he recruited board members. He also made Parmalat employees to help him pilfer company

funds and improperky record the distributions as stamps account or loans on the books.

• Tonna, CFO created the illicit and fraudulent technical devices that they used to conceal the situation.

• Lorenz Penca of Grant Thomton auditor firm, remained chief auditor for 9 years, even Italian government have role of

rotation after 3 years. Company has nonexistent account in bank of America he daimed that this account is existent in

order to show third party confirmation.

3-Cosal analysis:

Causes:
• First of all the fraud was initiated to conceal losses due to these enterprise in a effort to ensure future loans for further
international expansion
• The company havn’t stopped getting loans in spite of not being able to pay its dept
• The CEO wasn’t good placed, he couldn’t act without getting back to the CFO, without forgetting the $500 million deposit in
his own bank account
• The external auditors wasn’t independent and it may have been an illusion between them and Parmalat
• Auditors were chosen after a family or friendship relations between them and big shareholders of the company so they
weren’t professionals.
• Internal auditors were helping attempting the fraud instead of warning the committee of the fraud
• Lack of transparency for company’s stakeholders
4-Consequences:
• Tanzi, CEO jailed after being accused as first responsible of the scandal

• 14.3 billions of euros was signed as debt pf Parmalat’s in 2004

• Case of collusion between auditors and large publicity held corporation

• The bank of Italy which exercises the supervision of the banks estimated by the voice of its governor Antonio Fazio that the

case of Parmalat is explained by repeated episodes of crime in the management of a company. However, the limits of its role,

which is to guarantee market stability, have come to light

• The financial rating agencies, which assess the capacity of the borrowers to repay their obligations, did not degrade the quality

of the truth of Parmalat until December 2003, when the group admitted to being insolvent.
5-Recommendations:
• Leadership is a key aspect of the success of internal boards. If Parmalat had had a leader for its

independent directors, who did not also occupy the position of CEO, it would have insured

independence, integrity and objectivity

• The position of lead director and chairman of audit committee requiring and independent individual,

that is financially liberate with reasonable accounting experiences.

• Parmalat should had a proper viable and functional audit committee, it would had prohibited the

company’s CEO,CFO from hiring audit firm personnel for three years after those people had left the

firm
• They must use reasonable efforts to ensure management and auditors fulfill their obligations

• A ‘Sarbanes Oxley Act’ approach to the internal controls would have halted the Parmalat demise, regardless of

European criticism of the approach. Controls tested by outside auditors that also acted as a validation on the Tanzi

Family dominance, could have uncovered deceptive accounting behavior.

6-Conclusion:
• Major adjustments to accounts of the company to demonstrate to the markets/investors a healthier position.

• Forging documents and using various fictitious transactions, involving the materializations of receivables reported

as assets, to sell assets to special purposes entities.

• Fausto Tonna-off-balance sheet financing( securitization) to cover up losses and create off shore station to dump

imploded assets.

• Parmalat, continued borrowing at high rate, debt rapidly increased, whilst presenting profit and cash on its books.

These actions caused negative stock market reaction with continued ploy to issue bonds.
7-References:

• https://www.referenceforbusiness.com/history2/39/Parmalat-Finanziaria-SpA.html#ixzz6FgJO6FMh

• https://www.econcrises.org/2016/11/29/parmalat/

• https://studydriver.com/the-causes-for-parmalat-scandale-finance-essay/
Thank You!