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Cont
Parmalat has a strong tradition of innovation and develops products with a high value added to improve the diet of its customers. The global brands of the Group are Parmalat for milk and dairy products and Santl for fruit beverages. It is in charge of almost 50% of the dairy products in Italy. The company's founder and CEO is a man Calisto Tanzi, he is the son of a man who ran a small bakery, but as he grew old, he changed this to an international business in 1961.
Products
Revenue by Region
Rules of Ethics, which outlines the areas of responsibility and the behavior that should be followed to remain consistent with the Groups values and stresses the importance of complying with statutory requirements. Implementation, Control and Updates, which identifies the parties responsible for implementing the Code of Ethics and explains in practical terms how the Codes values and rules should be implemented and made part of daily practice.
Cont.
By 2001, many of the acquisition were producing losses, then company start using derivatives. In early 1993 Parmalat began to invent financial transactions to pad its balance sheet. It posted profits by fictitious transactions and aggressive acquisitions. In Feb 2003, CFO announced issue of bond of 500 million euro, which raised the question against company debt payment.
Cont..
The core of the fraud was system of double billing to Italian supermarkets and other retail customers. They simply done billing twice for the same shipment of merchandise. They created the impression that their account receivables were much larger then they really were. From about 1990-2003 Parmalat borrowed money from global banks and justified those loans by inflating its revenues through fictitious sales.
Cont..
CFO Fausto Tonna resigned and replaced by Alberto Ferrasis. In Sep 2003,fund raising effort of 300 million euro was dropped. Company share was depreciated significantly as a result raised over transaction with mutual fund Epicurum. The company not able to pay debt of 150 million euro. Tanzi resigned as chairman and replaced by Mr. Bondi. Bank of America release a document showing 3.95billion euro in Bonlats bank account as a forgery.
VIOLATION OF LAWS
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. To save from Bankruptcy Tanzi sold Parmalat to a dormant holding company listed in Milan stock exchange.
Cont..
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 than 50% independent directors. But in Parmalat, the board was composed of 3 independent directors remaining are executive directors 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
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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: Did 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: Did not found the companies 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 condition. Bank of America give higher rating to Parmalat bonds based on the fake account which never existent. 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 are not able to detect pattern of negligence and fraud.
Key Issues
Ethical Issues
The crimes that have been committed are not only illegal, but they go against appropriate behavior, what has been done is completely wrong. They have not only lied and shown a form of dishonesty, but the company has put a lot of people's careers at stake. The company as mentioned before, has made fake profits and built fake subsidiaries in order to gain assets and increase accounts. They have put a lot of investors and many shareholders under pressure. It does not only financially cause damage, but it shows how the company's CEO lacks integrity and commitment. Tanzi has tried to go the easy way to earn profit, and unfortunately he put not only himself but many of his colleagues, friends and family in a big black hole. The BOD and CEO are lack in accountability, supervisory skills and strategy formulation. Raised question like banks are diligent enough while dealing with Parmalat. Role function and power of regulators are not sufficient enough to monitors and enforce guidelines.
There seems to be an absence of assessments of internal and external factors before undertaking acquisitions using debts and derivatives. Factors include production losses and issue of debt without appropriate assets.
The Outcome
A fraud worth $ 8Bn. All changes in laws and governance are taken in accordance with the fraudulent activities of Parmalat. The CEO Tanzi has been sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in September 2008. Shares in the company which once had a market value of 1.8bn, are worthless, so millions of investors are out of pocket. Bank of America is thought to have provided between $150m (84mn) and $250mn in loans to Parmalat, those are trivial sums for America's third biggest bank. In April 2011 after a three year trial, Milan court acquits four banks Morgan Stanley, Bank of America, Deutsche Bank and Citigroup of market-rigging. Prosecutors had demanded that 120m of the banks profits should be impounded
FUTURE STEPS
The auditors can be hired from a specific firm and be hired under a contract, and there could be people alternating every specified month. The Bank should be more precise when giving out loans to businesses. The government should have strong corporate governance measurement. Imposing strict regulation on independent directors, executive director and auditors.