The Italian food group, Parmalat, and it’s and highly respected founder and Chief Executive Calisto Tanzi, have been at the centre of one of Europe’s biggest and most complex corporate governance scandals. A 14bn euro black hole in Parmalat’s bank account has been confirmed, but what are the facts behind this latest, and most intriguing of governance failures?
Key Facts
Parmalat was formed in 1961, and grew to become one of the most respected firms in Italy. Its core business was in the production of milk, as well as other food products.
The crisis came to a head in December when suspicions arose regarding difficulty in making a £108 million pound bond payment.
Parmalat had claimed that bond payment was delayed due to 4bn euros being temporarily marooned in an offshore account bank account in the Cayman Islands.
Evidence soon emerged that Parmalat had been using forged Bank of America letters to send to auditors to prove the existence of the 4bn euros.
On 26th January 2004, the auditors (Pricewaterhouse Coopers), determined that Parmalat’s debts were some 14.3bn euros, eight times what had originally been stated by its management. Furthermore, Parmalat had reported its core earnings for 2002 as being over 500bn euros higher than they actually were.
Parmalat’s founder and chief executive Calisto Tanzi is currently in jail, facing fraud charges. To date, Tani has only admitted to siphoning off around 500m euros from Parmalat finances to a company where his daughter was on the board of directors.
Why were Parmalat considered as responsible corporate citizens?
Parmalat was seen as a good corporate citizen, through significant donations to local causes such as the restoration of Parma’s City Cathedral (Parmalat’s home town) and its regard to the environment, through reports monitoring their impacts.
The business also had well-meaning internal codes of governance and policies, including a code of conduct for internal dealing. However, all this masked a spendthrift management culture, concealed behind false accounts.
How similar is the scandal to Enron?
According to the BBC ‘in many ways, Parmalat is the nearest thing Europe has produced to the failed Texan energy firm.’
The similarity exists, according to the BBC, in Parmalat’s fondness for ‘mind blowing financial wizardry’.
However, Enron’s collapse was some 11 times larger than that of Parmalat’s – Enron was a wreckage from which little was salvaged, compared to Parmalat which is still a sound business, aside from the 10bn euro black hole.
Enron sent shockwaves through corporate America, and exposed some serious flaws in corporate conduct and in the role of the authorities. Parmalat, although a heavy weight in its own market, is not central to Europe’s economy.
What will happen to Parmalat?
Parmalat has gone into ‘extraordinary administration’, under state appointed administrators, who are currently deciding which assets will be saved, and which sold off to creditors.
Parmalat will probably have to sell off many of its assets, namely companies it has acquired over the years.
What have been the impacts of Parmalat’s collapse?
Firstly, a number of global banks face significant financial and reputational damage from their dealings with Parmalat. The banks, namely Citigroup, Morgan Stanley, Deutsch Bank and Bank America are being taken to court by Parmalat shareholders for debt and shares sold on behalf of Parmalat, as well as being investigated in for their role in the disappearance of the 14bn euros.
Grant Thornton, the Auditor of 17 of Parmalat’s operating units and the Cayman Island finance subsidiary is also deeply embroiled in Parmalat scandal primarily because it audited Cayman Island subsidiary. Grant Thornton reaction has been in the expulsion of its Italian business from the firm’s global network.
Deloitte, Parmalat’s chief auditor, who raised concerns regarding Parmalat’s 2002 accounts, yet still signed off the financial statements, has also become involved in the investigations. Deloitte has been criticised for not acting as a ‘broom’ – however, the fact that there were two different auditors, meant that the rotation system did not make the chief auditor responsible for the whole company.
Outside of the big banks and auditing firms, Italy’s dairy farmers have been put at risk by the collapse of Parmalat. The company owes some 100m euros to the farmers, and the government have just passed emergency measures to protect the farmers. Farmers as far and wide as Brazil are also being affected by non payment of Parmalat, demonstrating yet again, the dependency of developing countries farmers and co-operatives on large corporations such as Parmalat ‘Everyone here depends on Parmalat for a living…if the company collapses it will be a disaster for all of us’.
