PARMALAT How the Milk Spilled
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Authors
Authors: Abdul Khader, Sanjib Datta,
Faculty Associate, Faculty Member
ICMR (IBS Center for Management Research).
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Snowballing Scandal Contd...
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The Bank of America case was just one instance of this. Prosecutors in the case discovered that in addition to the Bank of America letter, there were several other letters like that which were faked. Several statements of accounts and business transactions were also cooked up, and the majority of the third parties, including a Cuban company that supposedly bought tons of powdered milk from Parmalat, never actually had any business dealings with the company. The forging of documents and creation of fake accounts was a regular feature at the company. "Four times a year, the system of putting together false documents was activated on the occasion of the four balance sheet operations that the company had," Fausto Tonna,
the company's long standing CFO who resigned in March 2003, was reported to have
revealed to prosecutors.3 |
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Further investigation also revealed that the hole in the
company's accounts was much bigger than what was estimated and that it could be
even to the tune of €10 billion. Parmalat applied for bankruptcy in late December 2003, and was declared bankrupt by a court near Parma. Soon after this, the Italian government passed an emergency decree under which, Parmalat was assigned to special administration under a board headed by Bondi. The decree allowed the company to conduct business from working capital while being protected from creditors for 120 days.
What further aggravated matters was that, not only was Parmalat guilty of deception, but also tried to obstruct justice and hamper the work of the investigators. As the news of Bonlat's accounts broke, it was reported that a 'top official' within Parmalat ordered that all the documents relating to Bonlat be destroyed so that investigators did not find evidence. It was said that one of the company's employees smashed a computer with a hammer to destroy its hard disk. It was said to be the same computer that was used to create the fake letter from Bank of America. Analysts speculated that the 'top official' was probably Tanzi, but it yet has to be proved.
The Issues
The case of Parmalat's blatant deception raised a number of important issues that held a lot of relevance to those interested in corporate ethics. First, it dealt a strong blow to those analysts who smugly claimed for sometime after Enron and WorldCom that corporate governance and ethics at European companies, were better than those at their American counterparts. Coming close on the heels of French media giant Vivendi and Dutch retailer Ahold, Parmalat effectively proved them wrong.
Secondly, it brought the role of auditors sharply into focus. While Parmalat's auditors, Grant Thornton and Deloitte & Touche continued to claim that they were innocent and that they too were 'victims' of the fraud, there were very few takers for their assertions. Observers found it rather incredible that a company would find it so easy to hoodwink its auditors for over 15 years. Consequently, they believed that the auditors were hand-in-glove with the company's management. It was either that, or they did not perform their role sincerely. It is the responsibility of auditors to ensure that a company conforms to the principles of good governance. They have to spot financial irregularities in the company and conduct inquiries to determine their origin. However at Parmalat, the deception went unnoticed for years.
3] Tom Rachman, Parmalat scandal widens in Italy, Star Telegram, January 1, 2004.