PARMALAT How the Milk Spilled

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Authors: Abdul Khader, Sanjib Datta,
Faculty Associate, Faculty Member
ICMR (IBS Center for Management Research).

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Snowballing Scandal Contd...

For all Bondi's skill turning around hopeless cases, Parmalat is likely to prove a monumental challenge. His biggest challenge would be to unravel the Byzantine financial systems, involving several overseas subsidiaries and accounts in banks around the world. This itself, was likely to take a number of months, considering the complications that arose as investigations proceeded. Then he would have to devise a suitable plan to help put the company back on its feet.

As the investigation deepened, it became clearer that the complicated systems of accounting were created quite deliberately by company officials and that they been operational for well over 15 years, since the late-1980s. The company used a complicated system of bond and derivative deals to transfer amounts between its different subsidiaries around the world to create a picture of financial health for the entire group. It had a regular system for creating false accounts and exercised it four times a year, when the quarterly results were announced. In fact, a subsidiary called Bonlat was created in the Cayman Islands, specifically to act as a routing agency for all overseas transactions of the company.

Most of the money went from Parmalat to other overseas subsidiaries that were operating poorly or to Tanzi family businesses and Bonlat acted as an intermediary in the transactions. It was said that Tanzi issued directions to officials at Parmalat that money be sent through bank transfers to companies owned by him or his family, or to other subsidiaries of Parmalat. The amount so transferred would be accounted for as a credit owed to Parmalat from the other companies. Most of the amounts however, were book entries and created huge assets for Parmalat, even when no money actually existed. The balance sheets of the subsidiaries were then adjusted to make sense of the group's overall financial position, and then reported as audited numbers. The company used complex derivative transactions (many of which defied the comprehension of specialist investigators after the scandal broke), to aid these transfers and cover huge group debts. The amounts thus transferred came to millions of euros over the years and were so cannily done that the company's auditors also failed to discover anything wrong with the system.

In the course of the investigations, it was revealed that about 38 percent of Parmalat's assets were held in a Bank of America account by Bonlat. When asked to endorse this, Bank of America issued a statement to the effect that no such account existed with it and that it never did. However, Bonlat's auditors Grant Thornton said that the subsidiary had shown them a letter from the Bank proving the existence of the account earlier in the year. Bank of America said that it had not issued any such letter and that if a letter like that existed, then it was a fake. This resulted in a €4 billion hole in the company's accounts. This also dug out the fact that Parmalat regularly forged documents to help in the creation of false accounts.

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