Introduction
Parmalat started as a small family owned dairy shop in 1961 and grew to gigantic enterprise with over 30 branches in Italy. This business belonged to the Calisto Tanzi family who owned majority of the stake. It had significant impact on the world farm products market as well as the country’s economy. For example, about 5,000 farmers supplied milk to the company while 39000 were employed directly. However, the successful corporation was mismanaged and went bankrupt by 2003. The fall was mainly attributed to family members overriding internal control to commit fraud.
A scandal ensued in Parmalat industry in late 2003 after a discovery that about $ 5.64 billion funds that were supposed to be in the Bank of America saving account were not available. Milan prosecutors opened a case against the founder of the organization Calisto Tanzi, his family members, and some other executive official on March 2004. Consequently, the Bank of America Italian branches, 29 people, and accountants in Deloitte and Touche and Grant Thornton were investigated for three months before judgment.
The filed charges against the persecuted included false auditing, market rigging, and regulatory obstruction after a disclosure that about $ 21.15 billion was missing from the dairy group account. Three employees were jailed for their role in facilitating the fraud and law suit was filed against all the auditors involved. Despite the financial challenges, Parmalat is currently thriving in five continents. This paper discusses the happenings, cause and impact of fraud, and lesson learned from the fall of the business empire.
What happened?
Fraudulent activities, which led Parmalat to debts started in 1990s when a need for expansion into a bigger company arose. The company’s stock was made public to improve performance, attract investors and to propel it to international markets. In 1991, the founder bought Parma Football Club, which acquired fame rapidly but later recorded a huge deficit amounting to $ 77 million by 2002.
Calisto expanded his market globally by starting Parmalat Milk Company and buying from his competitors. He bought Odeon TV network and started a tourism venture, which later messed up his finances. Tanzi spent about £130 million on the TV channel network and sold it at £30million, which was a great loss. Due to these challenges the company invested using falsified figures, taking bank loans, and altering the books.
The company progressed aggressively and acquired properties using fabricated transactions from 1992. It obtained small enterprises from Hungary, Brazil, Italy, Argentina, and the US. From 1995, Parmalat was not able to fund its own needs although its records showed that the firm was registering profits. Several organizations were lured to invest in the enterprise, for instance, the Bank of America gave $1.7 billion to the enterprise through private placements and bonds and an additional $30 million for commissions and payments.
The Italian law requires companies to change external auditors after 9 years, thus, DeLoitte and Touche replaced Grant Thornton. Consequently, the new auditor exposed scandals in Parmalat in 1999. Nevertheless, Grant Thornton continued working closely with the company by facilitating illicit payments. In addition, the firm executives also took part in generating false debts and creating dishonest accounts from where the company can receive money. DeLoitte and Touche did not discover any irregularities with cash flow because Thornton records had been falsified.
In 1999, Parmalat finance director laid a financial scheme through Buconero Company based in Delaware. This enterprise transferred money to Parmalat Swiss subsidiary worth $137 million and in return it was paid 6%, an additional $7 for the services rendered. In addition to using Buconero, other offshores companies such as shell were utilized to conceal debts. For instance, in Latin America, corporation had been losing about 300 million yearly, this debts were wiped off in the financial records by utilizing 3 Caribbean shell companies.
Concerns were raised regarding huge debts accrued by Parmalat in the late 90s. For example, Esteban Pedro Villar filed a warning report concerning the Latin American Parmalat’s setup, which was termed ridiculous. After his expose some businesses such as Argentina Deloitte’s Parmalat were terminated to hide evidence and their accounts certified. Thereafter, in 2003 a similar complaint over fictitious transfer of $7 billion was launched by Wanderley Olivetti of Brazil, his concerns were ignored and he was excluded from dealing handling Parmalat accounts.
One of the key events that led to the exposure of Parmalat includes Tanzi and his son’s meeting with private equity firm Blackstone Group in New York. Tanzi and his son Stefano, one of the main executives at many of the family’s concerns, met with the Blackstone Group to discuss the sale of 51 percent of the family’s share in the food empire. It was in the course of conversation regarding preparation for the books to be opened to a transition team from Blackstone, that Tanzi and his son slipped out with the fact that the cash on hand was less than the 3 billion Euros registered in the company’s annual report. In addition to this, they revealed that there were barely any liquid assets. They even further stated that the company was in debt of about 10 billion Euros.
In addition to the suspicion that was brought against Parmalat through observations of its faulty accounting records, it is this final attempt to sell of 51 percent of family shares that marks the end of the road for Parmalat’s long trail of fraud.