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PARMALAT CASE

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Ditta Anna

on 29 November 2013

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Transcript of PARMALAT CASE

PARMALAT CASE
Corporate Governance presentation
But actually...
Parmalat bankruptcy was the biggest economic collapse in Europe (14 billions euro)
The owner of Parmalat, Calisto Tanzi was convicted to 18 years of detention for fraudolent bankruptcy
A number of Parmalat's employees, directors, accountants and auditors were convicted
Tanzi Family
Who to blame??
Pyramidal structure of the group
Tanzi Family at the top, Calisto Tanzi CEO and chairman
Nepotism and opaque transactions
Parmatour - daughter Francesca Tanzi; EURO 500m
AC Parma - son Stefano Tanzi
Overly optimistic

Counter argument: analysis on fraudulent reports

(!) Failed to account financial key figures which were
red flags

Credit Agency
Banks
Auditors
Thank you!
Anna Ditta

Pierre Delord

Daniel Lala

Christopher Markezinis

According to Calisto Tanzi in 2003 Parmalat is committed to:
be the most innovative company in the market
expand its core
provide attractive returns to its shareholders
deliver best quality products to its consumers
Calisto Tanzi



Fausto Tonna



Domenico Barili & Luciano Silingardi


Stefano e Francesca Tanzi


Luciano Del Soldato



Franco Gorreri



Gianfranco Bocchi




Claudio Pessina
10 years later
Facts and numbers:
• In 2003 banks declared they were victims of the economic collapse
• In 2004 the director Bondi sued for compensation from Deutsche Bank, Morgan Stanley, Bank of America and Citigroup for insider trading but they were discharged in 2011.
• According to Bondi:
Deutsche Bank
- loan 140 million euro /
217 million revenues
Unicredit
- loan 171 million /
212 million revenues

So can we consider banks as victims?

Possible concerns on bank liability

Insider trading
: banks issued Parmalat bonds although aware of the high debt giving misleading information to investors. CitiGroup recommended investors to buy bonds even few days before Parmalat collapsed.

Falsification of accounts
: Bank of America financed Parmalat Brazil that was already insolvent. Bonlat corporation based in Cayman Islands presumed to have 3.95 billion euro in liquid assets.

Collusion
: since the 60s Calisto Tanzi gave money to politicians to receive favours. Examples:
Luciano Silingardi
former auditor of Parmalat and head of Cassa di Risparmio di Parma
Franco Gorreri
Parmalat employee and head of Monte dei Paschi di Siena.

Many responsible people settled out of court in 2007 and now occupy important positions in local companies.
Is serving a term of imprisonment of 8 years for insider trading. He's waiting the final judgement for bankruptcy (17 years).
Former chief financial officer, 9 years and 11 months of imprisonment. Now works for a company that produces lift doors.
Former directors, sentenced to 8 and 7 years. Now they administer the assets of their families.
Son and daughter of Calisto, 4 and 3 years. Now they work for other companies.
Former CFO, sentenced to 6 years and 3 months, worked on social services. Has a management role in a local company.
Former president of Banca Monte and treasurer of Tanzi, has settled four years and ten months. Today he works in insurance sector.
Chief accounting officer who tried to destroy documents also hammering some computers, has bargained 3 years and 5 months. Today he works in the administration of an historical food industry.
Accountant, 3 years and 8 months, he collaborates with the University of Parma and plays baseball as a children's entertainer in Collecchio.
Bonolat Cayman Islands (subsidiary of Parmalat)
Est. & audited by Grant Thornton
Supposed to hold Euros 3.95 bn
Bank account = forgery.
Size of account -> red flag
Relied on Parmalat to confirm existence of account
Failed to detect fraud
Gave a positive opinion on the Parmalat group
Deloitte Brazil
Employee questioned Parmalt accounts -> taken off work on Pamalat accounts
Reliance on secondary auditors



Corporate Governance Issues
1) Independence of auditors

Close relationship b/w Parmalat & Deloitte/Grant Thornton
Work closely with (M), internal accountants & other senior employees
Conflict of interests -> compromises credibility
2)Over reliance on secondary auditors -
Deloitte became Chief Auditor in 1999
BUT Grant Thornton did audit work on 49% of Parmalat's total assets & 30% of its consolidated revenue
Problems with over reliance on secondary auditors
Difficult to tell whether info = fair and accurate
Harder to hold Chief Auditor accountable
Defeats the purpose of the Italian law requiring rotation
3) Effectiveness of Auditors
Current auditing system is imperfect & possibly needs to be supplemented by further mechanisms.

Other mechanisms:
Peer review system
-> auditor is controlled by other auditors e.g. In Germany, audit firms have to undergo periodical external peer review every 3 years.

Financial Reporting Enforcement Panel
- > new control introduced in Germany in 2004. This panel has the right to examine if the annual financial statements of a public company conform with generally accepted accounting principles.






Facts
Shareholders and Corporate Governance
Majority Shareholder - incentives to monitor the Board - reduction of agency problem
Majority Shareholder v. Minority shareholders
Majority Shareholder's self-interest
Board of directors
13 Board members - 8 executives, 5 non-executives, three-member audit committee (including CFO)
Mostly relatives and close friends, even non-executives
Lack of independence
Question No. 1
How would you
apportion blame
amongst the various parties involved in the financial collapse of Parmalat?

Question No. 3
Networks of Independent firms
(acting under one brand e.g. Grant Thornton)
vs.
Global Audit Firm
(1 parent co. with subsidiaries in different country) e.g. Deloitte

Which system do you favour?
Question No. 4
According to an Italian company law provision, companies need to
change their auditors every 8 years
.

Discuss the
advantages & disadvantages
of such a
requirement.

Question No. 2
Discuss the potential
conflicts of interest
that can arise when
financial institutions
are involved is
raising finance
for large companies and at the
same time offering investment advice
to clients and the public?
Advantages
Fresh eyes - new auditors may spot problems that previous auditors missed.

Less likely that companies will become 'cosy' with their auditors

Discourages fraud b/c of the risk that future auditors will spot it






Disadvantages
Helps to know clients' business intimately.

Increases the cost of auditing

Better Alternatives to rotation of auditors?
Rotation of lead
Forced separation of firms on audit & non-audit line




1. Helped to
circumvent
Italian antitrust laws.
2. Created
financial schemes
. Set up
offshore companies
(Cayman Islands):
Epicurum
Bonlat Financing
Employees serve on an offshore entity's board
3. Transfered funds among different
shell companies
(Satalux, Third Millenium ect. in Luxemburg).
4. Facilitated
contact
between Parmalat and investment banks.
5. Provided
false information
to investors and accountants.
6.
Destroyed
legal evidence before government investigators searched.
Zini & Associates
Outline
Tanzi Family
Banks
Credit Agencies
Lawyers
Auditors
Full transcript