After the Parmalat Storm

ITALIAN ITALIAN ECONOMY 

ECONOMY 

After the Parmalat Storm 

The “Italian Enron Case” and How the Authorities Are Trying to Rebuild Trust in Italy 

by by Laura Laura Naka Naka Antonelli 

Antonelli 

What’s going to happen to Italian 

capitalism? This question has 

been asked a thousand times, 

since the Parmalat bubble burst 

at the beginning of the year. Until then, for 

the American people, Italy was synonymous 

with good food and wine, great lifestyle, and 

an amazing fashion industry. Suddenly, this 

country also turned out to be a country of 

bribery, greed, and fraud. “The largest 

corporate fraud in Europe,” The Wall Street 

Journal reported, after the news hit the entire 

world. “Italy’s Enron,” experts of corporate 

governance said. Indeed, Parmalat did exactly 

what the American energy giant Enron did 

two years ago: the Italian dairy company, one 

of the most important in the world, covered 

up heavy losses with the help of the banks. 

Without knowing anything, investors kept 

buying its corporate bonds, which now the 

ex-giant is unable to refund. In the last years, 

the company accumulated debts totaling 10 

billion euros. The Securities and Exchange 

Commission in New York called the scandal 

“one of the largest and most brazen corporate 

financial frauds in history.” 

But for most Italian people, Parmalat was 

just the result of a wrong way of practicing 

capitalism, of “Business all in the Family” 

typical of Italian culture, as an article of USA 

Today wrote. The most worrisome fact is that 

the real problem is not Parmalat, but Italian 

capitalism itself, which sociologists define 

with a symbolic word: dynastic capitalism. 

Family business may reveal itself a good deal 

since the beginning: everybody, from the 

chief operating officer to the simplest 

dependent, feels there is trust and willingness 

to grow together, to build something new and 

unique. 

Then the company decides to hit the stock 

market by offering its shares to the public 

through the so-called IPO (Initial Public 

Offerings). At this point, things should 

change, and the company should focus on 

investors’ interests, giving up its family style 

of doing business. But in Italy it doesn’t 

work this way. “In Italy the government is 

weak, there is no sense of state, public 

services are bad and social services are weak. 

The family is so strong because it is the only 

institution that doesn’t let you down” – says 

Franco Ferrarotti, professor of sociology, in 

an interview with USA Today – “this country 

has used the family to create a new kind of 

capitalism and has become industrialized 

without losing its family orientation.” 

The most visible example is the Prime 

Minister, Silvio Berlusconi, the symbol of 

dynastic capitalism, blamed by different 

groups for pursuing interests of his own media 

company, Fininvest, and for breaking the 

antitrust law. Every time there is an attempt 

to defend public interests, Berlusconi wages 

a new battle, accusing Italy of being anticompetitive 

and against the free-market. The 

real problem is that everyone tries to preserve 

his own power, exploiting the deep 

connection between the economy and 

politics. Will Hutton of The Observer writes, 

referring to Calisto Tanzi, former chairman and 

C.E.O of Parmalat: “Tanzi pulled some political 

favors to build the core of Parmalat, and then 

exploited Italy’s weak regulatory 

environment, supported by the ideology that 

business must be free, to cover his tracks.” 

And with the latest confessions of Mr. Tanzi, 

the strong connection between the Italian 

industrial system and politics is finally coming 

out. “I think I have been one of the first 

people to explain what Parmalat is. It is a 

political company, which sustained the 

workings of a political system. It was a capital 

company, which didn’t actually have capital, 

which had access to banking financing in an 

unlimited way, and this because the management 

of the banking system was (and it is) 

run by political influence (....)”. This is an 

extract of what Piero Ostellino, one of the 

most renowned journalists in Italy, wrote in 

an article published by “Corriere della Sera.” 

But while entrepreneurs and politicians 

were exchanging favors, what were the 

authorities of regulation doing? Giulio 

Tremonti, the Italian minister of Finance, 

accused the authorities of supervision, 

Consob and the Bank of Italy, blaming them 

for not preventing such a scandal. 

The supervision of Italian companies is in 

the hands of Consob (National Commission 

for companies and the stock market). This is 

a public authority, which is responsible for 

regulating the Italian securities market. In 

the official Consob web site, we read: 

“Consob is the competent authority for 

ensuring: 

1) Transparency and correct behavior by 

securities market participants; 

2) Disclosure of complete and accurate 

information to the investing public by listed 

companies; 

3) Accuracy of the facts represented in 

the prospectuses related to offerings of 

transferable securities to the investing public; 

Former Parmalat Chairman and CEO, Calisto Tanzi, in jail (Ap) 

4) Compliance with regulations by auditors 

entered in the Special Register.” 

It can be said that Consob is the Italian 

Securities and Exchange Commission, whose 

task is to defend the interest of investors, by 

requiring public companies, listed on the 

markets, to disclose their financial information 

to the public, allowing investors to understand 

well each company’s financial stability 

and balance sheet. In the official site of S.E.C., 

we read: “only through the steady flow of timely, 

comprehensive, and accurate information 

can people make sound investment decisions.” 

At this point, it is important to say that 

S.E.C. also failed to assure the safety of million 

of investors. 

Consob operates along with the Bank of 

Italy, which controls the stability of the Italian 

banking system. As we read in the official site 

of the Bank of Italy, “the objectives of its supervision 

activity are the sound and prudent 

management of the intermediaries, the overall 

stability, efficiency, and competitiveness of 

the system and compliance with the rules and 

regulations governing credit.” The crack of 

Parmalat has led Tremonti to blame the activity 

of the Bank of Italy, “which didn’t do enough 

to guarantee the value of the bonds issued 

by the Tanzi group.” For Tremonti, the Bank 

of Italy has underestimated the problem of 

corporate bonds in the Parmalat case. The 

Berlusconi government is now thinking about 

giving birth to a new institution, whose task 

will be to protect savings and whose name will 

be the Authority of Savings. More power will 

be given to Consob, whose new name will be 

SuperConsob, and whose task will be to protect 

savings. A permanent commission will be 

Berlusconi Against “Bridges” 

The Italian Prime Minister Silvio Berlusconi has been criticized for suggesting 

that some National Festivities, such as January 6 and November 1, should be 

cancelled. After the initial complaints he corrected himself and clarified that “I 

was only talking about the ‘bridges’,” meaning the long weekends that Italians 

are known to always take. They are able to stay out of the office for almost a week but 

only use one of their vacation days! Statistics speak clearly, in Italy one week of work 

equals 0,4% of the total Gdp. If the Italians would work only two weeks more a year the 

Gdp will increase considerably. Berlusconi said that a recent study proved that in 

Europe 5 out of 10 citizens work. In the U.S. 6 out of 10 work…and in Italy? Only 4 out 

of 10! 

A&I A&I REVIEW- REVIEW- a a publication publication of of of the the ITALIAN ITALIAN AMERICAN AMERICAN MUSEUM MUSEUM - - APRIL APRIL 4, 4, 2004 

2004 

3 

set up. Its objective will be a better exchange 

of financial information between the Bank of 

Italy, the Authority of Savings, the Antitrust, 

and then the authorities for insurance companies, 

Isvap, and Covip, which are responsible 

for monitoring the activity and transparency 

of pension funds. But a new system requires a 

new mentality, too. And everybody knows 

that Italian entrepreneurs are often straddling 

politics and business. So, Italy has finally decided 

to strengthen the power of supervisors, 

following the same path the United States 

already adopted. US Congress has indeed 

created a new regulatory body, The Public 

Company Accounting Oversight Board, chaired 

by William McDonough. The aim is tightening 

accounting rules, after a lot of companies 

“cooked their books” to inflate their 

revenues. 

Nevertheless it must be said that for Italy 

a lot of work must be done. There are also 

other issues, since one problem leads to 

another. A system, which lacks flexibility is 

not competitive either, and Italian companies 

are now struggling in the international 

environment, filled with companies whose 

strategies are getting more aggressive each 

day. The latest economic data released are 

not promising: in the month of January, the 

total revenues of Italian industries fell 6.5%, 

versus a gain of +1.3% during the same period 

a year ago. The orders of goods and services 

plunged 6.1%, while industrial production 

decreased 2.8%. And international exports 

fell 4.4% in the year 2003. In a recent interview 

in the daily La Repubblica, Vittorio Rossi, 

chairman and chief operating officer of Siemes 

Italia, said: “Italy has gained an image, which 

is worse than the one it really deserves. That’s 

why foreign investments in our country are 

falling. Italian people have a genetic lack of 

organization. They create, but they are not 

able to operate in a big environment. This is 

why large Italian companies have almost 

disappeared.” 

But not everything is so bad in the 

economy of Italy. Italian people are among 

the most creative in the entire world, and 

foreigners are always interested in Italian 

products. Even if exports decreased in the 

last year, commercial trade continues to do 

well in some countries. As it is written in the 

site of the Italian Embassy, the bilateral 

relationship with the U.S. is strong and 

growing. During 2003, the United States 

imported about $25 billion in Italian goods, 

while exporting about 10 billion in U.S. goods 

to Italy. Now, everything will depend on 

how Italian companies are going to 

reposition themselves in a global market, and 

how they will try to squeeze their costs. But 

according to the experts, Italy has a lot to 

give to the world, thanks to its creativity, 

which is traditional and unique in a lot of its 

aspects. More companies have already 

understood the importance of growing in 

such vital markets, as in the U.S. The latest 

example has been brought to New York by 

Geox, a leader of shoes in Italy, which has 

recently opened its first store in Manhattan. 

And it seems that other companies are 

planning to do the same. They are trying to 

convince the world that Italy is not just 

Parmalat and scandals, but it’s a dynamic 

market destined to expand itself in the future, 

rejecting the old habit of straddling 

economics and politics. The commitment 

to doing better is just beginning to be 

unveiled.

108 

Corporate Ownership & Control / Volume 2, Issue 2, Winter 2005 

CRITICAL ISSUES ON THE ENFORCEMENT OF THE “TRUE 

AND FAIR VIEW” ACCOUNTING PRINCIPLE. LEARNING 

FROM PARMALAT. 

Andrea Melis* 

Abstract 

This paper analyses and discusses the “positive” issues of the overriding international 

financial reporting standards principle of “true and fair view” in connection with corporate 

governance mechanisms. The analysis is based on case study evidence. Empirical evidence 

from the Parmalat case with regards to the role of the information supply and demand side 

agents is analysed. This study provides evidence on how the relationship between corporate 

financial reporting and corporate governance mechanisms may influence the enforcement of 

the international financial reporting standards overriding principle of “true and fair view”. 

Evidence is found that the enforcement of the “true and fair view” principle is intrinsically 

flawed when the accountability and the overall corporate governance systems do not work 

properly. Some evidence is also found for the argument that a lack in the quality of 

information supplied by the corporate financial system hurdles the role information demand 

side agents as effective monitors. 

Keywords: financial reporting, fair value, Parmalat 

Andrea Melis, Lecturer of Accounting, at the Department of Ricerche aziendali, University of Cagliari, Viale S. Ignazio 17, 

09123 Cagliari, Italy. Fax: (+39) 0706753321, Email: melisa@unica.it 

Introduction 

The aim of the paper is to analyse and discuss the 

“positive” issues of the overriding international 

financial reporting standards principle of “true and 

fair view” in connection with corporate governance 

mechanisms. Its main purpose is to study how the 

relationship between corporate financial reporting 

and corporate governance mechanisms may 

influence the enforcement of the international 

financial reporting standards overriding principle of 

“true and fair view”. 

A case study approach will be adopted to 

examine the above-mentioned relationship. The 

analysis will based on the empirical evidence 

emerged from the Parmalat case. 

Parmalat was Italy’s eighth largest company, 

employed 36,000 people worldwide, and was a 

world leader in dairy food business. Since December 

2003, when it collapsed and entered bankruptcy 

protection, it also represents one of the biggest 

accounting frauds in corporate history. 

However, Parmalat may also constitute an excellent 

case study for scholars and policy makers to 

learn: it is more evident how the relationship between 

corporate governance mechanisms and financial 

reporting quality works when something goes 

wrong than when everything goes smoothly. 

Empirical evidence about the role of the information 

supply side agents (e.g. senior management, 

internal monitors, such as board of statutory auditors, 

audit committee and board of directors, and external 

auditors) as well as of information demand side 

agents (e.g. institutional investors, financial analysts 

and rating agencies) in the Parmalat case will be analysed 

to understand how their roles influenced the 

enforcement of the “true and fair view” principle. 

The paper is structured as follows. Section 2 briefly 

reviews the theoretical framework and the related 

academic literature on the relationship between corporate 

financial reporting quality and governance. 

Section 3 presents the research methodology adopted 

in the paper, highlighting major strengths and limitations 

of the use of a case study approach to attempt 

to address the research question. Section 4 investigates 

the role of information supply and demand side 

agents in the Parmalat case. Section 5 concludes.


Related literature and theoretical 

framework 

From a normative perspective financial statements 

are considered as an “information medium”, which 

meets the principles of “neutrality” and overall “true 

and fair view” (e.g. Dezzani, 1981). In its framework 

I.A.S.B. (2003) points out that “the objective of 

financial statements is to provide information about 

the financial position, performance and changes in 

financial position of an enterprise that is useful to a 

wide range of users in making economic decisions”. 

Nevertheless, since an early work (Amaduzzi, 

1949) it has been argued that financial statements, 

and the overall financial reporting system, are in fact 

the result of a conflict of interests and balance of 

powers between different corporate stakeholders. 

This argument was raised well before the 

introduction of the generally accepted accounting 

principles. However, the institution of generally 

accepted accounting principles is not able by itself to 

eliminate the above-mentioned problem. 

Firstly, generally accepted accounting principles 

usually allow the possibility of different accounting 

treatments being applied to essentially the same 

phenomena. Naser (1993) points out that such 

flexibility gives room to subjectivity and may give 

birth to the so called “creative accounting” 

phenomenon (also known as “earnings 

management” 66 ). The principle of “true and fair 

view” is pursued formally, rather than substantially. 

Nelson et al. (2003) define three types of 

earnings management: a) consistent with generally 

accepted accounting principles; b) hard to distinguish 

from generally accepted accounting principles; and 

c) clearly misapplying generally accepted accounting 

principles. 

Healy and Wahlen (1999) provide a wide 

literature review of the studies concerning creative 

accounting in the U.S and its implications for 

standard setters. 

Scope for choice of accounting methods may be 

reduced either by limiting the number of permitted 

accounting methods or by specifying circumstances 

in which each method can be adopted. The latest 

developments in International Accounting Standards 

are pursuing the objective of reduction in accounting 

choices (IASB, 2003). 

However, even the institution of more detailed 

(less flexible) generally accepted accounting 

principles may not be able to enforce the true and 

fair principle. 

66 Amat and Gowthorpe (2004, p. 4) point out that “the 

preferred term in the USA, and consequently in most of the 

literature on the subject is ‘earnings management’, but in 

Europe the preferred term is ‘creative accounting’... It 

should be recognised that some accounting manipulation 

involves primarily balance sheet rather than earnings management”. 

For the purpose of this paper both terms will be 

used as equivalents. 

Firstly, the elimination of management judgement 

in financial reporting is neither optimal for investors 

nor feasible (Healy and Wahlen, 1999). In 

fact the valuation process of corporate activities (e.g. 

the period of depreciation of a specific asset) is 

intrinsically subjective (Melis G., 1995). 

Secondly, as Weil (2002) points out, although 

the institution of specific accounting rules for specific 

transactions may lead to a more uniform reporting 

of the covered transactions, such uniformity has 

a cost: an aggressive corporate management is likely 

to claim that if an accounting principle (or rule) does 

not specifically prohibit something, then it is to be 

considered as allowed. 

Palepu and Healy (2003) argue that inflexible 

accounting standards increase the external auditor’s 

dependence on specific rules (and eventually weaken 

its position) as well as they incentive financial 

engineering specifically designed to get around these 

rules. 

Forker (1992) reports that the presence of a 

dominant corporate insider is associated with poor 

disclosure. Oricchio (1997) reviews various cases in 

which information provided by financial statements 

did not give a true and fair view of a company, rather 

an information which was functional to the interests 

of a dominant corporate insider. 

Beasley (1996) and Dechow et al. (1996) found 

that firms with more independent boards are 

significantly characterised by a lower likelihood of 

financial statement fraud and earnings management. 

More recently, Peasnell et al. (2000), Klein 

(2002), and Beekes et al. (2004) report that board 

composition is an important factor in determining the 

quality of reported earnings, and the extent of earnings 

management permissible within the framework 

of generally accepted accounting principles. Carcello 

and Neal (2003) found evidence of a significant positive 

relation between the percentage of affiliated 

directors on the audit committee and optimistic disclosures 

for companies experiencing financial distress. 

Uzun et al. (2004) found that board composition 

and the structure of a board's oversight committees 

are significantly correlated with the incidence of 

corporate fraud. Abbott et al. (2002) point out that 

lack of audit committee independence and financial 

expertise exhibit a significant association with 

financial reporting fraud. 

In an early work, Gordon (1964, p. 262) argued 

that senior management is likely to select accounting 

procedures that, “within the limits of its power”, 

maximise its own utility, by manipulating the 

information in the financial statements in its own 

favour, rather than accounting procedures that pursue 

the “true and fair view” overriding goal. 

The “limits of its power” are defined by the 

level of residual judgement left by accounting 

principles as well as the effectiveness of the 

accountability system due to corporate governance 

mechanism (Melis, 2003). 

109

110 


Previous theoretical studies (e.g. Whittington, 

1993; Melis, 2004a) argue that corporate financial 

reporting and corporate governance systems are 

highly correlated, with any improvement in either 

system having a positive influence on the other, and 

vice versa. In fact, as presented in exhibit 1 the out- 

Source: Melis (2004a) 

Such process is carried out through a network of 

intermediaries (see exhibit 2) that include institutional 

investors (e.g. banks, mutual funds, etc.), information 

analysers (e.g. financial analysts and ratings 

agencies) on the information demand side as 

Reduces information asymmetries 

Balances powers 

Fig. 1. Financial reporting and corporate governance 

put produced by one system constitutes the input 

needed by the other and vice versa. Both corporate 

financial reporting system and corporate governance 

system pursue the accountability of corporate insiders 

towards other legitimate corporate stakeholders. 

well as assurance professionals (e.g. external auditors) 

and internal governance agents (corporate 

boards, internal auditors, etc.) on the supply side of 

information. 

Fig. 2. The information market: intermediation chain between senior management and investors 

Source: Palepu and Healy (2003). 

Financial reporting 

system 

True and fair view 

Accountability 

Corporate 

governance system


Bushman and Smith (2001) provide a good attempt 

at documenting the studies on the relationship 

between financial reporting and corporate governance 

in the U.S.. 

Amat and Gowthorpe (2004) point out that 

accounting regulation without enforcement is likely 

to be ineffective in preventing corporate insiders 

from employing misleading reporting practices. 

Palepu and Healy (2003, p. 2) note that the a 

well-functioning capital market should create 

adequate linkages of information, incentives, and 

governance between corporate insiders and outsiders. 

However, when the corporate governance 

system does not work properly, in presence of a 

dominant corporate insider the enforcement of the 

generally accepted accounting principle of “true and 

fair view” seems to become a critical issue. 

Research methodology 

The paper adopts a case study as research method. 

The case study does not represent a sample. In fact, 

case study research is not sampling research (e.g. 

Stake, 1995, Yin, 1989). It deals with analytic rather 

than statistical generalisation, i.e. its main goal is to 

expand and generalise theories rather than to 

enumerate frequencies (Yin, 1989). 

Yin (1989, p. 146) points out that a case study is 

able to give a relevant contribution to the state of art 

when the underlying issues are at least nationally 

important, either in theoretical terms or in policy or 

practical terms. The Parmalat case seems to meet the 

above-mentioned criterion, since it is relevant to an 

international audience: Melis (2004c) reported that 

although Parmalat is to some extent a particularly 

Italian case, this does not imply that the problems 

emerged at Parmalat may be disregarded and catalogued 

as country-specific, since they may also affect 

other firms around the world. 

Scapens (1990) argues that the use of case studies 

can serve two very different research agendas: 

either of descriptive-explorative or of descriptiveinterpretative 

style. It also is believed that such research 

agendas are not necessarily in conflict (e.g. 

Onida, 1951; Rusconi, 1986; Gabrovec Mei, 1999). 

Therefore, in the research presented in this paper, the 

empirical evidence from the case study will be 

adopted for “hypothesis testing” (in terms of analytic 

generalisation) as well as “hypothesis generation” 

purposes. 

Furthermore, case study is considered as one of 

the most effective research methods to investigate on 

qualitative questions, such as “how may X influence 

Y?” (Yin, 1989). 

Thus, evidence from the Parmalat case potentially 

presents a very good test case (although extremely 

negative) to study how the relationship between 

corporate financial reporting and corporate 

governance mechanisms may influence the enforcement 

of the international financial reporting standards 

overriding principle of “true and fair view”. 

It has been argued (e.g. Rusconi, 1986; Yin, 

1989; Hamel et al., 1993) that, in order to be 

successful, a case study needs to rely on a wide 

variety of sources of evidence, rather than being 

limited to a single one. Starkey (1997) points out that 

access to corporate data is a key condition to the 

success of a case study. However, interviewing as 

data gathering method is fundamentally flawed with 

regards to a bankrupted company as Parmalat in 

which prosecutors are still investigating and some of 

the main corporate actors are accused of fraud. 

Despite difficulties to access data, this case 

study relies on a good variety of sources, such as 

corporate financial statements (including board of 

statutory auditors’ report, external auditors’ report, 

etc.), corporate ownership and control data, 

corporate governance reports, board of directors’ 

minutes, shareholders’ annual meetings’ minutes, 

corporate conference presentations to institutional 

investors, reports of the public authority responsible 

for regulating and controlling the Italian securities 

markets and, last by not least, financial analysts’ 

reports. 

The enforcement of “true and fair view”: 

role of information demand and supply 

side agents at Parmalat 

Empirical evidence from the Parmalat case seems to 

support the argument that the relationship between 

corporate financial reporting and corporate 

governance mechanisms influences the enforcement 

of the international financial reporting standards 

overriding principle of “true and fair view”. 

By analysing Parmalat Finanziaria’s consolidated 

financial statements there is very little evidence 

that the letter of current accounting standards 

was violated. For example, the accounting of an alleged 

income received from a currency swap with 

the Epicurum fund that, in accord to the International 

Accounting Standards (IASB, 2003), should have 

been reported as a liability in the balance sheet while 

the carrying value would have be adjusted based on 

fair value assessments at future reporting dates. 

However, few accounting issues were found in Parmalat’s 

consolidated financial statements. Even so, 

they clearly did not give a true and fair view of the 

corporate group’s financial situation and performance. 

Although, they did not misapply the letter of 

the generally accepted accounting principles, they 

violated their overall “spirit”: the overriding principle 

of “true and fair view” was clearly not enforced. 

Rather than an exploitation of loopholes of the accounting 

standards that allowed to conceal the “true” 

corporate financial results, what emerges at Parmalat 

is a major falsification of corporate accounts. 

Parmalat is about creative accounting in the 

sense that, among other items, some assets were 

“created” in order to give a “rosier” picture of the 

corporate group, rather a “true and fair” view of its 

financial position and performance. 

111

112 


Senior management, or at least part of it, falsified 

company accounts to manage assets, liabilities 

and earnings which could not be managed otherwise 

(According to PriceWaterhouseCoopers, which 

serves as external auditor after the bankruptcy, 

Parmalat’s financial statements included created 

assets and sales, overstated profits, while debts were 

under reported.). Parmalat’s former chief finance 

officer (Tonna) acknowledged to Italian prosecutors 

a nearly fifteen year long systematic falsification of 

accounts at the company. 

By examining and discussing the roles of information 

supply and demand side agents at Parmalat 

the paper attempts to understand how the relation- 

ship between the corporate financial reporting and 

corporate governance influenced – negatively – the 

enforcement of the “true and fair view” accounting 

principle. 

Role of information supply side agents 

Senior management, external auditors and internal 

corporate governance bodies are the key information 

supply side agents. 

Parmalat’s ownership and control structure was 

characterised the presence of a large shareholder (the 

Tanzi family) that, either directly or indirectly, controlled 

the majority of voting shares (50,02%). 

Fig. 3. Parmalat group’s ownership and control structure: a simplified version 

Such structure provided a solution to the classical 

agency problem between senior management and 

shareholders 67 . Senior management was accountable 

67 As noted in La Porta et al. (2000) and Melis (2000) the 

presence of a blockholder reduces the agency problem between 

senior management and the controlling shareholder, 

to the controlling shareholder (who also held the 

positions of C.E.O. and Chairman) and did not select 

accounting procedures to manage the information in 

but it creates an agency problem between the controlling 

shareholder and minority shareholders.


the financial statements according to its own interests 

at the expenses of the controlling shareholder. 

However, the Tanzi family had adequate power 

(and interests) to exploit private benefits from the 

corporate group via financial statements that gave an 

information which was functional to its own 

interests. This happened at the expenses of minority 

shareholders, whom did not have enough powers to 

have their interests safeguarded 68 . 

In order to try to counterbalance the power of 

the Tanzi family and have adequate information to 

make their economic decisions (e.g. sell their 

shares), minority shareholders would have needed 

well-functioning internal governance agents and an 

external auditor able and willing to foster the 

enforcement of the “true and fair view” accounting 

principle. 

Board of directors, board of statutory auditors 

and internal control committee were the major 

internal governance agents at Parmalat. Together 

with the external auditors, they all failed in assuring 

corporate financial reporting quality. 

In the next paragraphs, empirical-based analysis 

will shows that this happened because their 

structures, as well as their members’ modus 

operandi, were not functional to the enforcement of 

the “true and fair view” accounting principle. 

4.1.1 Role and composition of board of 

directors 

Parmalat Finanziaria’s board of directors was 

dominated by corporate insiders. 

Composed by thirteen members, in its reports on 

corporate governance Parmalat Finanziaria claimed 

that five members of its board of directors were to be 

considered as non-executive directors 69 . Thus, eight 

of them were executive directors. Four members 

(one N.E.D. and three executive directors, including 

the C.E.O-Chairman) were linked by family ties. 

Moreover, an executive committee was set up and 

composed by seven directors, including the three 

Tanzi family members that held executive positions 

(see exhibit 4). 

Eight of Parmalat Finanziaria directors also sit at 

the board of directors of Parmalat S.p.A., including 

the members of the executive committee and one 

68 Melis (2000, p. 351), paraphrasing Roe (1994), points 

out that the key corporate governance issue in Italy concerns 

“weak managers, strong blockholders and unprotected 

minority shareholders”. This is not suggesting that 

Parmalat is a particularly Italian case (Melis, 2004c), as it 

represents an extremely negative example that could have 

happened elsewhere. 

69 This fact is rather unusual among Italian listed companies. 

C.O.N.S.O.B. (2003) reports that non-executive directors 

usually represent the majority of members in Italian 

listed companies board of directors (average 70% of the 

members), even when the company is controlled by a majority 

shareholder (average ratio non executive - executive 

2:1). 

non-executive director (who had family ties with the 

Tanzis). 

Among its five alleged non-executive directors, 

Parmalat claimed that three of them were to be 

considered as independent directors. 

The Preda code (2002, para 3) defines as independent 

a director that: a) does not entertain, directly, 

indirectly or on behalf of third parties, nor 

have s/he recently entertained, with the company, its 

subsidiaries, the executive directors or the shareholder 

or group of shareholders who control the 

company, business relationships of a significance 

able to influence their autonomous judgment; b) does 

not own, directly or indirectly, or on behalf of third 

parties, a quantity of shares enabling them to control 

or notably influence the company or participate in 

shareholders' agreements to control the company; c) 

is not close family of executive directors of the 

company or person who is in the situations referred 

to in the above paragraphs. 

Further analysis based on data not provided by 

the company reveals that one of the alleged 

independent directors (Silingardi), who was also the 

Chairman of the internal control committee, was in 

fact the chartered certified accountant of the Tanzi 

family as well as an old personal friend of the 

Chairman-C.E.O. Tanzi. Thus, he cannot be 

considered as truly independent. 

Dominated by the Tanzi family, no surprise that 

the Parmalat’s board of directors did not safeguard 

minority shareholders (none of them could appoint 

one representative on the board). The board had no 

interest in assuring corporate financial reporting 

quality, thus it did not foster the enforcement of the 

“true and fair view” accounting principle. 

113

114 


Exhibit 4. Composition of Parmalat Finanziaria’s board of directors 

Name (1) Position (1) Notes 

Tanzi Calisto Chairman / C.E.O. Founder and major shareholder of the company. 

Baracchini Enrico N.E.D. Chairman of the remuneration committee. 

Barili Domenico N.E.D. 

Member of the executive committee. Senior manager from 

Del Soldato Luciano Executive director 

1963 until 2000. Member of the remuneration committee. 

Joined the board in March 2003. Chief Financial Officer 

since November 2003. Previously Chief Administration and 

Control Officer. 

Ferraris Alberto Executive director 

Chief Financial Officer from March until November 2003. 

Previously country manager (Australia). 

Gherardi Antonio Executive director Left the board in January 2003. 

Giuffredi Francesco Executive director Member of the internal control committee. Senior manager. 

Mistrangelo Piero N.E.D. 

Sciumé Paolo N.E.D. Member of the remuneration committee. 

Silingardi Luciano N.E.D. 

Chairman of the internal control committee. Tanzi’s 

chartered accountant and close friend. 

Tanzi Giovanni Executive director Son of Chairman-C.E.O. Manager. 

Tanzi Stefano Executive director Son of Chairman-C.E.O. Manager. 

Tonna Fausto Executive director 

Chief Financial Officer from 1987 until March 2003. 

Member of the internal control committee. 

Visconti Paola N.E.D. Family ties with the Tanzi family. 

Source: (1) Elaborated from company information and C.O.N.S.O.B. database. 

4.1.2 Role and composition of internal 

control committee 

Lack of independence also flawed the role of the 

internal control committee at Parmalat. 

Preda code (1999, 2002, para 10.2) recommends 

the internal control committee to a) assess the 

adequacy of the internal control system, b) monitor 

the work of the corporate internal auditing staff, c) 

report to the board of directors on its activity at least 

every six months, and d) deal with the external 

auditing firm. 

Set up in 2001, the composition of the Parmalat 

Finanziaria’s internal control committee did not 

comply with what recommended by the Preda code 

(1999, 2002, para 10) with regards of the presence of 

independent non-executive directors. 

It was composed by three members. Two 

executive directors and one N.E.D. (Silingardi), who 

was close to the Tanzi family. That is non-executive 

directors did not represent the majority of the 

committee, in addition there was no really 

independent director on the committee, besides the 

chief finance director (Tonna) was a member of the 

internal control committee. 

Such composition clearly flawed the role of such 

committee as a monitor. In its corporate governance 

reports, Parmalat has never given any explanations 

about it. 

It is now evident that the committee’ 

composition was functional to maintain concealed 

the fraud, rather than fostering the enforcement of 

the “true and fair view” of the group’s financial 

situation and performance. 

4.1.3 Role and composition of board of 

statutory auditors 

Until 2003 Italian law required listed companies to 

set up a board of statutory auditors 70 . According to 

the 1998 company law (Draghi reform, 1998, Art. 

149) its main tasks and responsibilities include: a) to 

check the compliance of acts and decisions of the 

board of directors with the law and the corporate 

bylaws and the observance of the so-called “principles 

of correct administration” by the executive directors 

and the board of directors; b) to review the 

adequacy of the corporate organisational structure 

for matters such as the internal control system, the 

administrative and accounting system as well as the 

reliability of the latter in correctly representing any 

company's transactions; c) to ensure that the instructions 

given by the company to its subsidiaries concerning 

the provision on all the information necessary 

to comply with the information requirements 

established by the law are adequate. 

70 Company law changed in January 2004. It allows companies 

to maintain the traditional board structure with the 

board of statutory auditors or select either a British-like 

unitary board structure (with an audit committee within the 

board of directors) or a two–tier board structure (with a 

management committee and a supervisory council, without 

labour representation). See Ferrarini et al. (2003) and 

Romano and Taliento (2003) for a discussion.


50,02% 

2,06% 

2,2% 

45,72% 

Coloniale S.p.A. Lansdowne Partners Limited Partnership Hermes Focus Asset Management Europe Limited Free float (1) 

Exhibit 5. Parmalat Finanziaria’s ownership structure 

Source: Elaborated with data based on C.O.N.S.O.B database updated at 30 th June 2003. (1) Free float includes all 

shareholdings with less than 2 percent of the voting capital at the end June 2003. 

The size of the board of statutory auditors has a 

direct influence over the level of protection on 

minority shareholders because the following powers 

may be exercised only by at least two statutory 

auditors jointly 71 : a) to seek the cooperation of the 

company’s employees in performing its tasks; b) to 

convene a shareholders’ meeting because of a 

directors’ decision. Only in a five-member board of 

statutory auditors minority shareholders are given the 

right to appoint two auditors 72 . 

Parmalat Finanziaria’s board of statutory auditors 

was composed by three members. Corporate bylaws 

set up a threshold of 3% of company voting 

shares for minority shareholders to appoint a statutory 

auditor. Given Parmalat Finanziaria’s ownership 

structure (see exhibit 5) this rule made appointing a 

statutory auditor harder for minority shareholders. 

The Parmalat Finanziaria board of statutory auditors 

never sent any alert in their reports to shareholders. 

Nor reported anything to courts, or to C.O.N.S.O.B. 73 

(Cardia, 2004). In December 2002 Hermes Focus 

Asset Management Europe Ltd filed the board of 

statutory auditors a demand to investigate about a) 

the accounting of preference shares; b) the disclosure 

about some put options related to Parmalat Administracao 

Ltd, c) the related party transactions between 

Parmalat Finanziaria and a Tanzi owned company 

that operated in the tourism sector (H.I.T. S.p.A.); d) 

the accounting of some intangible assets of Parma 

Football Club. 

The board of statutory auditor answered denying 

that any irregularity (“atypical” and/or unusual re- 

71 See Melis (2004b) for further analysis on the relationship 

between the composition of the board of statutory auditors 

and the level of minority shareholders’ protection. 

72 Corporate by-laws are required to provide the number of 

auditors (three at least) and shall ensure that one statutory 

auditor (or two, when the board is composed by more than 

three auditors) is appointed by the minority shareholders 

(Draghi reform,1998 Art. 148). 

73 C.O.N.S.O.B. (Commissione Nazionale per le Società e 

la Borsa) is the public authority that is responsible for regulating 

and controlling the Italian securities markets. 

lated party or inter-company transaction”), either de 

facto or de jure, was going on 74 . 

Either because of lack of resources, 

independence or incentives, the board of statutory 

auditors failed to assure corporate financial reporting 

quality. 

4.1.4 Role of external auditors 

External auditors at Parmalat failed to exercise their 

role of monitors. Not only they failed in assuring that 

the corporate financial reporting was giving a true 

and fair view of Parmalat’s financial situation and 

performance, but also did not uncover the accounting 

fraud that went on for approximately fifteen years. 

Before its collapse, Parmalat was audited by 

three chief auditors in the last two decades: Hodgson 

Landau Brands (an Italian auditing firm), Grant 

Thornton and Deloitte & Touche. Hodgson Landau 

Brands was the first auditor, then Grant Thornton 

took over and served as auditor for Parmalat 

Finanziaria, and other companies belonging to the 

Parmalat group, from 1990 until 1998. 

Due to the compulsory auditor rotation (Draghi 

reform, 1998, art. 159) 75 , Parmalat Finanziaria had to 

change its chief auditor and Grant Thornton was 

replaced by Deloitte & Touche in 1999. 

The main purpose of mandatory auditor rotation 

is to foster auditors’ independence from their clients, 

thus reinforcing its role as monitor. However, in this 

case it has hardly contributed to the unveiling of the 

fraud. 

With this regards, what happened at Parmalat is 

worth noting. Empirical evidence shows that auditor 

rotation was not in fact fully adopted at Parmalat. 

74 See attachment of the board of statutory auditors’ report 

at the 2003 shareholders’ meeting. 

75 Italian law makes lead auditor rotation mandatory after 

three appointments, leading to a maximum of nine years for 

audit engagement. Italy is the only large economy to have 

made auditor rotation compulsory. The external auditing 

firm is appointed by the shareholders’ meeting, although 

the board of statutory auditors has a voice on the choice of 

the firm. 

115

116 


Firstly, further investigation shows that Penca 

and Bianchi, (respectively, President and partner of 

Grant Thornton in Italy since 1990), the two Grant 

Thornton auditors that dealt with Parmalat, had 

worked for Hodgson Landau Brands until 1989, for 

which they audited the Parmalat group since 1980s. 

Moreover, in 1999 Parmalat found a loophole in 

the 1998 company law that allowed an incumbent 

auditor to remain as a “subcontractor” even after the 

nine-years engagement period. While Deloitte & 

Touche took over as chief auditor, Grant Thornton 

(specifically the two above-mentioned auditors) con- 

tinued to audit Parmalat S.p.A. as well as some Parmalat 

off-shore subsidiaries even after 1998. In particular, 

they audited the Cayman islands based Bonlat 

Financing Corporation, which held the now sadlyknown 

fictitious Bank of America account as major 

asset. Deloitte & Touche never took overall responsibility 

for Parmalat’s consolidated financial statements, 

underlying that their opinion was basely solely 

upon other auditors’ reports with regards to the part 

of the group’s total assets and consolidated revenues 

(see exhibit 6) which came from subsidiaries that 

were audited by other auditors (i.e. Grant Thornton). 

Exhibit 6 

Year 1999 2000 2001 2002 

Total assets of the group non audited by the chief 

auditor 

Consolidated revenues non audited by the chief auditor 

22% 

16% 

Source: Elaborated with data based on Deloitte & Touche reports 

Deloitte & Touche S.p.A. never reported any 

alert in their reports, nor directly to C.O.N.S.O.B. 

until 31 st October 2003 (two months before Parmalat 

collapse). They issued a review report on the interim 

financial information for the six months ended June 

2003 in which they claimed to be unable to verify the 

carrying value of Parmalat’s investment in the 

Epicurum Fund. Cardia (2004) notes that such 

decision was a consequence of C.O.N.S.O.B.’s 

pressure on the auditor. 

Parmalat’s accounting fraud became public only 

after Bank of America stated that bank account that 

Parmalat claimed to have (with some millions of 

euro deposited) did not exist. 

As noted in Melis (2004c), it seems reasonable 

to argue that auditors could have discovered the 

fraud if they had acted according with general 

auditing standards and exhibited the proper degree of 

professional “scepticism” in executing their audit 

procedures. 

In fact, bank deposits are not complicated items 

to audit. They are to be matched to a bank statement 

as part of a company’s reconciliation procedures in 

order to assure that bank statements received by the 

client and used in the reconciliation process have not 

been altered. This did not happen at Parmalat: 

prosecutors reported that Grant Thornton auditors 

relied on the Parmalat’s internal mail system, rather 

than getting in contact with Bank of America 

directly. Grant Thornton auditors’ role reminds the Enron 

case, in which auditors proved to be not independent 

from their client. Parmalat former C.F.O. (Tonna) 

reported to prosecutors that the idea of the setting up 

of Bonlat Financing Corporation was proposed by 

Grant Thornton auditors in order to maintain 

concealed Parmalat’s financial crisis at the eyes of 

the incoming chief auditor Deloitte & Touche. 

40% 

23% 

42% 

23% 

49% 

30% 

4.2 Role of information demand side 

agents 

Financial analysts, ratings agencies are the key 

information analysers. Together with institutional 

investors are the agents that characterise the demand 

of information in capital markets. Retail investors 

are not likely to have adequate ability and resources 

to analyse and influence the information provided by 

the corporate financial reporting system, nor having 

their “voice” heard by corporate insiders. 

Empirical evidence seems to show that they all 

failed to understand what was going on at Parmalat. 

4.2.1 Role of information analysers 

Standard & Poor’s published its first rating on 

Parmalat in November 2000. The rating assigned 

was BBB-, which the lowest level of the investmentgrade 

category, with a stable outlook. The rating 

took into account the stability of Parmalat’s business 

sector, the company position in the market, its good 

geographical diversification and increasing focus on 

higher value-added products. These positive factors 

were counterbalanced by mitigated by Parmalat’s 

lack of growth prospects in major markets and its use 

of debt to fund acquisitions in 1997-2000 

(Pierdicchi, 2004). 

In June 2002, the rating’s outlook was revised 

to positive from stable. However, after the release of 

the company half-year interim report In September 

2003, Standard & Poor’s revised its credit outlook to 

stable from positive due to the delay in balancing its 

financial structure (high gross debt position). On 11 th 

November, the outlook was revised to negative “because 

of concerns about the quality and transparency 

of the groups accounts and how it invested liquidity” 

(Pierdicchi, 2004). Parmalat was rated as a speculative 

investment only on 9 th December, when the rat-


ing was lowered to B+, because of “severe concerns 

about the company’s liquidity” 76 . The day after the 

rating was further lowered to CC, “in order to reflect 

a clear risk of default” (Pierdicchi, 2004). 

It was only two weeks before the company filed 

for bankruptcy. Standards & Poor’s claimed to a 

victim of the fraud, having systematically received 

false and misleading information by Parmalat 

(Pierdicchi, 2004) and stated that their rating 

methodology relies on the quality of information 

provided by the company, i.e. they rely on the supply 

side of information agents. 

Alike in the Enron case, financial analysts seem 

to have not detect Parmalat’s collapse until the very 

penultimate moment. The lack of financial reporting 

quality hurdled their role: when financial statements 

are false, as in the Parmalat case, financial statement 

analysis techniques are intrinsically flawed. 

Parmalat’s “numbers” were forged adequately to 

portray a “rosy” picture of the group’s financial 

situation and performance. 

Only on 5 th December 2002, a financial analyst 

(Merrill Lynch's London office) released a research 

report in which Parmalat was downgraded to a sell 

rating (and the volatility risk was raised to high). 

Merrill Lynch issued other seven public reports in 

2003 reinforcing its sell recommendation. 

Nevertheless, the rest of the financial analysts’ 

community seems to have not been aware of what 

was going on at Parmalat. However, using financial 

statements analysis techniques on data publicly 

available at the time Melis and Melis (2004) found 

some evidence that might have lead a sophisticated 

analyst to have some doubts on Parmalat’s financial 

situation. Further investigation is needed to 

understand whether sell-side analysts had only a 

“passive” role, or rather they also contributed to the 

lack of the financial reporting quality. 

4.2.2 Role of institutional investors 

Very little institutional investors’ voice concerning 

Parmalat’s financial statements was publicly heard. 

The only exception is Hermes Focus Asset 

Management Europe Ltd, which, in December 2002, 

filed Parmalat Finanziaria’s board of statutory 

auditors a demand to investigate about specific 

irregularities (as mentioned in 4.1.3). 

It is not clear yet to what extent institutional 

investors had their potentially active role in 

Parmalat’s corporate governance hurdled by the 

misguiding information provided by the corporate 

financial reporting, or by their ties with banks. 

76 On 8 th December Parmalat failed to pay on time a 

bond for a relatively modest amount of € 150 million. It 

seemed unjustified in light of the reported liquidity (over 

three billion euro). Thus, major concerns arose about the 

existence of such liquidity. 

In fact, prosecutors have placed some banks, 

which either sold Parmalat’s bonds or helped it to 

obtain financing, under investigation in order to find 

out whether such banks were aware of the true financial 

situation of Parmalat. Not to mention that, alike 

in the Enron case, some banks were earning high 

fees from Parmalat, the key the problem with such 

banks is that they were major long-term lenders of 

Parmalat. Therefore, they might not have had adequate 

incentives to uncover the fraud. As Diamond 

(2004, p. 1448) points out, a Parmalat lender who 

learns of the senior management’s actions is likely to 

have incentives to keep secret for a significant 

period, because as lender it has much to lose if the 

actions become public immediately. 

5. Final remarks, limitations and future 

research 

The paper has analysed and discussed the issues of 

the enforcement of the overriding international 

financial reporting standards principle of “true and 

fair view”. It has been argued that financial reporting 

quality needs to be analysed in connection with 

corporate governance mechanisms. 

This study was based on the empirical evidence 

provided the Parmalat case. 

Empirical evidence about the role of the 

information supply side agents (e.g. senior 

management, internal monitors, such as board of 

statutory auditors, audit committee and board of 

directors, and external auditors) as well as of 

information demand side agents (e.g. rating agencies, 

financial analysts, and institutional investors) at 

Parmalat has been explored and analysed. 

This study provides evidence on on how the relationship 

between corporate financial reporting and 

corporate governance mechanisms may influence the 

enforcement of the international financial reporting 

standards overriding principle of “true and fair 

view”. Evidence is found that the enforcement of the 

“true and fair view” accounting principle is intrinsically 

flawed when the accountability system and the 

overall corporate governance system do not work 

properly. In the Parmalat case information supply 

side agents’ structures and modus operandi were not 

functional to foster the enforcement of the “true and 

fair view” accounting principle, rather they were 

well-designed to pursue Tanzi’s own interests, by 

concealing the “true and fair” financial situation and 

performance. Some evidence is also found on the 

argument that a lack in the quality of information 

supplied by the corporate financial system hurdles 

the role information demand side agents as effective 

monitors of corporate insiders. The main limitation 

of the paper relates to questions on the degree of 

“generalisability” of the interpretive framework developed. 

The findings in the paper are based on a 

single case study evidence, thus the degree to which 

they apply to other firms needs being further explored. 

Despite this shortcoming of the research, the 

117

118 


interpretive framework developed can serve as a 

preliminary stage in the process of theorisation. In 

fact, Parmalat presents an extreme negative example. 

Future research could investigate the relationship 

between the corporate financial reporting and the 

corporate governance systems, with particular regards 

to the issues of de facto enforcement of the 

overriding principle of “true and fair view”, in positive 

cases, i.e. cases in which an effective accountability 

system is able to foster the enforcement of the 

above-mentioned accounting principle. 

References 

1. Abbott L., Parker, S., Peters, G. (2002), Audit 

Committee Characteristics and Financial 

Misstatement: A Study of the Efficacy of Certain 

Blue Ribbon Committee Recommendations, 

Working paper. 

2. Amaduzzi A. (1949), Conflitto ed equilibrio di 

interessi nel bilancio dell’impresa, Bari: 

Cacucci. 

3. Amat O., Gowthorpe C. (2004), Creative 

Accounting: Nature, Incidence and Ethical 

Issues, Universitat Pompeu Fabra Economics 

and Business Working Paper No. 749. 

4. Beasley M. (1996), An Empirical Analysis of 

the Relation between the Board of Director 

Composition and Financial Statement Fraud, 

The Accounting Review, Vol. 71, No. 4., pp. 

443-465. 

5. Beekes W., Pope P., Young S. (2004), The Link 

Between Earnings Timeliness, Earnings 

Conservatism and Board Composition: evidence 

from the UK, Corporate Governance - An 

International Review, Vol. 12, N. 1, pp. 47-59. 

6. Bushman, R., Smith A. (2001), Financial 

Accounting Information and Corporate 

Governance, Journal of Accounting and 

Economics, Vol. 31, pp. 237-333. 

7. Cardia L. (2004), I rapporti tra il sistema delle 

imprese, i mercati finanziari e la tutela del 

risparmio, Testimony of the C.O.N.S.O.B. 

President at Parliament Committees VI 

“Finanze” and X “Attività produttive, 

commercio e turismo, della Camera and 6° 

“Finanze e tesoro” and 10° “Industria, 

commercio e turismo” del Senato, 20th January. 

8. Carcello J, Neal T. (2003), Audit Committee 

Independence and Disclosure: choice for 

financially distressed firms, Corporate 

Governance - An International Review, Vol. 11, 

N. 4, pp. 289-299. 

9. Dechow P., Sloan R., Sweeney A. (1996), 

Causes and Consequences of Earnings 

Manipulation: An analysis of firms subject to 

enforcement actions by the SEC, Contemporary 

Accounting Research, Vol. 13, pp. 1-36. 

10. Dezzani F. (1981), La “neutralità” del bilancio 

d’esercizio oggetto della certificazione e i 

principi contabili generalmente accettati, in 

AA.VV., Bilancio di esercizio e 

amministrazione delle imprese. Studi in Onore 

di Pietro Onida, Milan: Giuffrè. 

11. Diamond D. (2004), Presidential Address, 

Committing to Commit: Short-term Debt When 

Enforcement Is Costly, Journal of Finance, Vol. 

LIX, N. 4, pp. 1447-1479. 

12. Draghi reform (1998), Testo unico delle 

disposizioni in materia di intermediazione 

finanziaria, Legislative Decree N. 58/1998. 

13. Ferrarini G., Frasca F., Colombo A. (2003), Il 

nuovo diritto societario, Quaderno N. 206, 

Associazione per lo Sviluppo di Studi di Banca 

e Borsa. 

14. Forker J. (1992), Corporate Governance and 

Disclosure Quality, Accounting and Business 

Research, Vol. 86, N. 22, pp. 111-124. 

15. Gabrovec Mei O. (1999), Il linguaggio 

contabile. Itinerario storico e metodologico, 

Giappichelli, Turin, II ed. 

16. Gordon M. (1964), Postulates, Principles and 

Research in Accounting, The Accounting 

Review, Vol. 39, N.2, pp. 251-263. 

17. Healy, P. and Wahlen, J. (1999), A review of the 

creative accounting literature and its 

implications for standard setting, Accounting 

Horizons, Vol. 13, No. 4, pp. 365-83. 

18. I.A.S.B. (2003), International Financial 

Reporting Standards, London: IASCF. 

19. La Porta R., Lopez-de-Sinales F., Shleifer A., 

Vishny R. (2000), Investor Protection and 

Corporate Governance, Journal of Financial 

Economics, Vol. 58, N.1, pp. 3-27. 

20. Klein A. (2002), Audit Committee, Board of 

Director Characteristics, and Earnings 

Management, Journal of Accounting and 

Economics, Vol. 33, pp. 375-400. 

21. Melis A. (2000), Corporate Governance in Italy, 

Corporate Governance - An International 

Review, Vol. 8, N. 4, pp. 347-355. 

22. Melis A. (2003), Informazione esterna 

d’impresa: neutralità e conflitti di interesse, Il 

Controllo legale dei Conti, Vol. 7, N. 3, pp. 259- 

280. 

23. Melis A. (2004a), Financial reporting, corporate 

communication and governance, Corporate 

Ownership and Control, Vol. 1, N. 2, Winter 

2004, pp. 31-37. 

24. Melis A. (2004b), On the Role of the Board of 

Statutory Auditors in Italian listed companies, 

Corporate Governance - An International 

Review, Vol. 12, N. 1, pp. 74-84. 

25. Melis A. (2004c), Corporate Governance 

Failures. To What Extent is Parmalat a 

Particularly Italian Case?, presented at 

"Corporate Governance: Effective Directors and 

Responsible Investors”, 2nd International 

Conference on Corporate Governance, Centre 

for Corporate Governance Research, University 

of Birmingham, U.K, 29 th June.


26. Melis G. (1995), Sulla natura economica dei 

valori iscritti nel nuovo bilancio europeo, Annali 

della Facoltà di Economia di Cagliari, Vol. XI. 

27. Melis G., Melis A. (2004), Financial Reporting, 

Corporate Governance and Parmalat. Was it a 

Financial Reporting Failure?, University of 

Cagliari - Dipartimento di Ricerche aziendali 

working paper. 

28. Naser K. (1993), Creative Financial Accounting. 

Its Nature and Use, London: Prentice Hall. 

29. Nelson M., Elliott J., Tarpley R. (2003), How 

Are Earnings Managed? Examples from Auditors, 

Accounting Horizons, Vol. 17, Supplement, 

pp. 17-35. 

30. Onida P. (1951), Le discipline economicoaziendali: 

oggetto e metodo, Milan: Giuffré, II 

ed. 

31. Oricchio G. (1997), Valenza informativa dei 

bilanci ordinari e teorie motivazionali e 

comportamentali degli amministratori: alcune 

riflessioni, Rivista Italiana di Ragioneria e di 

Economia Aziendale, July-August. 

32. Palepu K. and Healy P. (2003), The Fall of 

Enron, Journal of Economics Perspectives, Vol. 

17, N. 2, pp. 3-26. 

33. Parmalat Finanziaria S.p.A. (1998, 1999, 2000, 

2001, 2002), Annual reports. 

34. Parmalat Finanziaria S.p.A. (2001, 2002, 2003), 

Informativa sul sistema di Corporate 

Governance ai sensi della sezione IA.2.12 delle 

istruzioni al Regolamento di Borsa Italiana spa. 

(Reports on Corporate governance). 

35. Parmalat S.p.A. (1998, 1999, 2000, 2001, 2002), 

Annual reports (available only in Italian). 

36. Peasnell K., Pope P., Young S. (2002), Accruals 

Management to Meet Earnings Targets: UK 

Evidence Pre and Post-Cadbury, British Accounting 

Review, Vol. 32, pp. 415-445. 

37. Pierdicchi M. (2004), Testimony of the Standards 

& Poor's General director, at Parliament 

Committees VI “Finanze” and X “Attività produttive, 

commercio e turismo of the Camera 

and 6° “Finanze e tesoro” and 10° “Industria, 

commercio e turismo” of the Senate, 3rd February. 

38. Preda Code (1999, 2002), Codice di 

Autodisciplina, Milan: Borsa Italiana. 

39. Roe M. (1994), Strong Managers, Weak Owners. 

The Political Roots of American Corporate 

Finance, Princeton: Princeton University Press. 

40. Romano M., Talento M. (2003), I controlli 

interni ed esterni nei modelli di governance delle 

società di capitali, Il Controllo legale dei conti, 

Vol. 7, pp. 393-426. 

41. Rusconi G.F. (1986), Induzione e deduzione 

nelle ricerche di economia aziendale, Rivista 

Italiana di Ragioneria e di Economia Aziendale, 

May-June. 

42. Scapens R. W. (1990), Researching Management 

Accounting Practice: The Role of Case 

Study Methods, British Accounting Review, Vol. 

22, pp. 259-285. 

43. Stake R. (1995), The Art of Case Study Research, 

Newbury Park, CA: Sage publications. 

44. Starkey K. (1997), Case study as a research 

method: Ford motor corporation, seminar held 

at the School of Management and Finance, University 

of Nottingham, 18 th November. 

45. Uzun H., Szewczyk S., Varma R. (2004), Board 

Composition and Corporate Fraud, Financial 

Analysts Journal, Vol. 60, N. 3, pp. 33-43. 

46. Weil R. (2002), Fundamental Causes of the 

Accounting Debacle at Enron: Show Me Where 

It Says I Can’t, Summary of Testimony for 

Presentation 06-Feb-2002 The Committee on 

Energy and Commerce 10. 

47. Yin R.K. (1989), Case Study Research. Design 

and Methods, Newbury Park, CA: Sage publications. 

119

http://www.article13.com/A13_ContentList.asp?strAction=GetPublication&PNID=808 

The case of Parmalat 

The Italian food group, Parmalat, and it’s and highly respected founder and Chief 

Executive Calisto Tanzi, have been at the centre of one of Europe’s biggest and most 

complex corporate governance scandals. A 14bn euro black hole in Parmalat’s bank 

account has been confirmed, but what are the facts behind this latest, and most 

intriguing of governance failures? 

Key Facts • Parmalat was formed in 1961, and grew to become one of the most 

respected firms in Italy. Its core business was in the production of 

milk, as well as other food products. 

• The crisis came to a head in December when suspicions arose 

regarding difficulty in making a Ł108 million pound bond payment. 

• Parmalat had claimed that bond payment was delayed due to 4bn 

euros being temporarily marooned in an offshore account bank 

account in the Cayman Islands. 

• Evidence soon emerged that Parmalat had been using forged Bank 

of America letters to send to auditors to prove the existence of the 

4bn euros. 

• On 26th January 2004, the auditors (Pricewaterhouse Coopers), 

determined that Parmalat’s debts were some 14.3bn euros, eight 

times what had originally been stated by its management. 

Furthermore, Parmalat had reported its core earnings for 2002 as 

being over 500bn euros higher than they actually were. 

• Parmalat’s founder and chief executive Calisto Tanzi is currently in 

jail, facing fraud charges. To date, Tani has only admitted to 

siphoning off around 500m euros from Parmalat finances to a 

company where his daughter was on the board of directors. 

Why were Parmalat 

considered as 

responsible corporate 

citizens? 

How similar is the 

scandal to Enron? 

• Parmalat was seen as a good corporate citizen, through significant 

donations to local causes such as the restoration of Parma’s City 

Cathedral (Parmalat’s home town) and its regard to the 

environment, through reports monitoring their impacts. 

• The business also had well-meaning internal codes of governance 

and policies, including a code of conduct for internal dealing. 

However, all this masked a spendthrift management culture, 

concealed behind false accounts. 

• According to the BBC ‘in many ways, Parmalat is the nearest thing 

Europe has produced to the failed Texan energy firm.’ 

• The similarity exists, according to the BBC, in Parmalat’s fondness 

for ‘mind blowing financial wizardry’. 

• However, Enron’s collapse was some 11 times larger than that of 

Parmalat’s – Enron was a wreckage from which little was salvaged, 

compared to Parmalat which is still a sound business, aside from 

the 10bn euro black hole. 

• Enron sent shockwaves through corporate America, and exposed 

some serious flaws in corporate conduct and in the role of the 

authorities. Parmalat, although a heavy weight in its own market, is

What will happen to 

Parmalat? 

What have been the 

impacts of Parmalat’s 

collapse? 

not central to Europe’s economy. 

• Parmalat has gone into ‘extraordinary administration’, under state 

appointed administrators, who are currently deciding which assets 

will be saved, and which sold off to creditors. 

• Parmalat will probably have to sell off many of its assets, namely 

companies it has acquired over the years. 

• Firstly, a number of global banks face significant financial and 

reputational damage from their dealings with Parmalat. The banks, 

namely Citigroup, Morgan Stanley, Deutsch Bank and Bank 

America are being taken to court by Parmalat shareholders for debt 

and shares sold on behalf of Parmalat, as well as being 

investigated in for their role in the disappearance of the 14bn euros. 

• Grant Thornton, the Auditor of 17 of Parmalat’s operating units and 

the Cayman Island finance subsidiary is also deeply embroiled in 

Parmalat scandal primarily because it audited Cayman Island 

subsidiary. Grant Thornton reaction has been in the expulsion of its 

Italian business from the firm’s global network. 

• Deloitte, Parmalat’s chief auditor, who raised concerns regarding 

Parmalat’s 2002 accounts, yet still signed off the financial 

statements, has also become involved in the investigations. 

Deloitte has been criticised for not acting as a ‘broom’ – however, 

the fact that there were two different auditors, meant that the 

rotation system did not make the chief auditor responsible for the 

whole company. 

• Outside of the big banks and auditing firms, Italy’s dairy farmers 

have been put at risk by the collapse of Parmalat. The company 

owes some 100m euros to the farmers, and the government have 

just passed emergency measures to protect the farmers. Farmers 

as far and wide as Brazil are also being affected by non payment of 

Parmalat, demonstrating yet again, the dependency of developing 

countries farmers and co-operatives on large corporations such as 

Parmalat ‘Everyone here depends on Parmalat for a living…if the 

company collapses it will be a disaster for all of us’.

http://www.time.com/time/magazine/article/0,9171,785318,00.html 

Sunday, Nov. 21, 2004 

How It All Went So Sour 

By PETER GUMBEL | Milan 

For a hard-charging executive like Alberto Ferraris, being named chief financial officer of 

a €7.6 billion company was a career-making moment — and he wasn't going to let a few 

nagging doubts stand in his way. Since the company was Parmalat, the Italian dairy-andfood 

conglomerate the U.S. Securities and Exchange Commission has charged with 

perpetrating "one of the largest and most brazen corporate financial frauds in history," 

and since Ferraris now faces charges of market rigging and issuing false information, he 

may wish he had heeded those doubts. But back in March 2003, he says, he knew the 

company had some financial problems but had no idea how bad things were about to get. 

Parmalat was trying to style itself as the "Coca-Cola of milk," and Ferraris, 46, a former 

Milan-based corporate banker for Citigroup, had spent six years building its operations 

in Canada and Australia. But in late February the company stock had nosedived when the 

firm's irascible CFO, Fausto Tonna, announced an unexpected new bond issue — a fresh 

increase in corporate debt — that came on the heels of several other big capital-raising 

moves. Parmalat's founder and lifetime CEO, Calisto Tanzi, called back the bonds the 

following day and replaced Tonna with Ferraris to calm the waters. Within a few days, 

the thickset new CFO was defending his company before a roomful of financial analysts 

in Milan. He painted a rosy picture: sales and earnings were up, debt was under control, 

and the firm was awash in cash. Satisfied that he'd reassured the financiers, Ferraris 

hoped the worst was over. "It was my job to patch up relations with the market," he told 

Time in an interview at his lawyer's Milan office. 

Then his doubts started to pile up. First, Ferraris says, he couldn't understand why the 

company was paying so much to service its debt; the interest payments seemed far higher 

than warranted for the €5.4 billion in debt on the books. Even more troubling, the 

company wouldn't give him total access to the corporate accounts. When Ferraris 

complained to Tonna (who, to his annoyance continued to deal with some of the banks), 

he says he was told that chief accounting officer Luciano Del Soldato, a 20-year Parmalat

veteran, would continue handling the accounts as a consolation prize for not getting the 

CFO job. 

Ferraris reluctantly accepted the division of roles, but wasn't satisfied. So he asked two 

trusted members of his staff to mount a quiet investigation. After calling around 

Parmalat's worldwide operations, they came back with shocking news: a total debt 

estimate of €14 billion, more than double that on the balance sheet. "Until then, I never 

suspected the accounts were false," says Ferraris. 

He knew he had to go to the top. In mid-October he met with Tanzi. Until then, Ferraris 

says, he had valued Tanzi as "an excellent person, a real entrepreneur" — a charismatic 

but steady leader who was so proficient at math that he always spotted calculation errors 

in presentations. "I expected him to say, 'Your numbers are wrong.'" Instead, he recalls, 

Tanzi just shrugged. "He said, 'Eight billion, 11 billion, 14 billion — it's all the same.'" 

Stunned, Ferraris urged Tanzi to call a meeting with the company's banks to explain the 

situation. Tanzi refused, and Ferraris quit. "I was flabbergasted," he says. 

A few weeks later, on Dec. 19, 2003, the biggest corporate scam in European history was 

exposed when Parmalat confirmed that an account it had claimed to have at Bank of 

America with €3.95 billion in cash simply did not exist. That was merely the first 

revelation in the scandal that turned Parmalat into Europe's Enron, a morass of fraud 

and financial failure made all the more dramatic by the fact that the company was Italy's 

eighth largest and had established itself as a global consumer brand. 

In the past year, the story of Parmalat has emerged in fits and starts, as three teams of 

forensic accountants have combed through the company books and dozens of executives 

— including Tonna, Tanzi, Ferraris and Del Soldato — have made detailed confessions to 

magistrates in Parma and Milan. Using their testimonies and thousands of pages of 

official documents, it's now possible to piece together the key parts of the affair. Here's 

the inside story of how the Coca-Cola of milk managed to go sour. 

A CRUDE FORGERY 

For well over a decade, from about 1990 to 2003, investigators say, Parmalat borrowed 

money from global banks and justified those loans by inflating its revenues through 

fictitious sales to retailers. In a scheme that authorities charge was devised and executed 

by Tanzi, top managers, the firm's outside lawyer, Gian Paolo Zini, and two outside 

auditors, Maurizio Bianchi and Lorenzo Penca, it would then cook its books some more 

to make the debt vanish, by transferring it to shell companies based in offshore tax

havens. (Zini, Bianchi and Penca deny any wrongdoing.) When the hole grew too large to 

hide, Tanzi, Tonna and the two auditors allegedly came up with Parmalat's most 

audacious invention: a bogus milk producer in Singapore that supposedly supplied 

300,000 tons of nonexistent milk powder to a Cuban importer via Bonlat, a Cayman 

Islands subsidiary that held the fake Bank of America account. "What struck and 

surprises me is the simplicity," says Francesco Greco, the senior magistrate in Milan on 

the case. "It was almost banal." 

So far, 29 people have been charged in Milan; more are expected to be charged in coming 

weeks by magistrates in Parma. Parmalat's losses are now officially put at €12 billion and 

its investors have lost another €14 billion — though the company's 33,000 employees 

have emerged relatively unscathed, as the firm continues to operate while in bankruptcy. 

Most of the money that moved in, around and out of the company has since been traced, 

although the final destination of some of it is still unknown. Tanzi has admitted 

transferring some €500 million to family firms, but investigators tell Time that up to €1.3 

billion may have gone this route. 

But one huge mystery remains: how could such a crude forgery have continued for so 

long, and on such a massive scale? For years, Parmalat dealt with the world's largest 

banks, its most sophisticated investors and its most reputable auditors. How did they 

miss the signals that the company was cheating? It's not an academic question: if 

Parmalat had gone bust in 1995, when it could no longer fill all its funding needs in Italy, 

it would have been a mid-sized Italian failure with debts of about €560 million. Instead, 

Parmalat took its warped finances global. By the time of the collapse eight years later, it 

owed its investors €14 billion. Bank of America alone, beginning in 1997, arranged $1.7 

billion in financing through bonds and private placements for U.S. investors, and 

received more than $30 million in fees and commissions. Citigroup systematically 

packaged and resold the firm's receivables, even installing its own software at Parmalat 

headquarters to help track them; between 1999 and 2003, it earned $35 million. Grant 

Thornton and Deloitte & Touche signed off on its increasingly surreal accounts and 

booked millions of dollars in fees for doing so. In the company's final weeks, Deutsche 

Bank took on the assignment of helping it work with Standard & Poor's, which kept its 

"investment grade" rating on the firm until 10 days before the collapse. And analysts 

worldwide encouraged investors to keep buying its stocks and bonds. According to one 

study, 75% of the analysts covering Parmalat had a "buy" or "neutral" rating on the stock 

three months before it collapsed. 

Were these financial stalwarts victims of Parmalat's deceptions? Or, as the failed

company's bankruptcy administrator Enrico Bondi alleges, were they more like well-paid 

enablers, looking the other way while helping Parmalat hobble toward ruin? That 

question will come to a head this week as Giuseppe Coscioni, the Parma judge overseeing 

the bankruptcy, must decide whether foreign banks claiming they are owed hundreds of 

millions will be included in the list of creditors. "The risk for Parmalat is that if the 

international banks are cut out as creditors, they could make life very tough for the 

company when it emerges from bankruptcy next year," says one person close to the U.S. 

banks. 

FUNDING THE "BLACK HOLE" 

Alberto Ferraris wasn't the only one who thought highly of Calisto Tanzi. Until Parmalat 

collapsed, the 66-year-old founder was an almost legendary figure in Italy, viewed as a 

classic entrepreneur who built a world-class company from scratch. Soon after founding 

Parmalat as a dairy company in 1961, he was quick to embrace a new pasteurization 

technology that allowed milk to stay fresh for months without refrigeration. Parmalat's 

distinctive cartons soon became a fixture in stores across Italy, and ultimately conquered 

Europe and much of the world. Tanzi also discovered the power of sports marketing, and 

plastered the Parmalat name on events from World Cup skiing to Formula One racing. A 

pious Catholic, Tanzi was a generous benefactor who sponsored the restoration of 

Parma's 11th century basilica and funded its professional soccer team. And he seemed 

modest about his achievements. He didn't smoke, drank little and drove his own Lexus. 

Behind his company's facade of success, however, a hole kept growing. Parmalat's 

finances were in poor shape by the late 1980s as a result of a disastrous foray into 

television, according to the testimony of top executives. In 1987, it spent €130 million on 

a station called Odeon TV that it hoped to build into Italy's third major network, but 

which collapsed after three years. To stave off bankruptcy, Tanzi engineered a so-called 

reverse merger, under which it sold itself to a dormant holding company already listed on 

the Milan stock exchange. The combined firm then raised about €150 million from 

outside investors. That enabled Parmalat to go public in 1990, and plug some of the gaps 

in its accounts; at the time it had a market value of around €300 million. But as early as 

1993, Parmalat allegedly began to invent financial transactions to pad its balance sheet. 

Investigators in Milan and Parma agree: if it hadn't cooked the books, Parmalat would 

have posted losses every year from 1990 to the end. Instead, it posted profits, masking its 

problems with a mixture of fictitious transactions and aggressive acquisition; starting in 

1992, the group began snapping up dairy and other companies in Italy, Brazil, Argentina, 

Hungary and the U.S. "It was a reversal of logic," says Vito Zincani, the chief investigating 

magistrate in Parma. Usually, companies take on debt to grow. But in Parmalat's case,

"they had to grow to hide the debt." 

The core of the fraud was a system of double billing to Italian supermarkets and other 

retail customers. Simply put, by billing twice for the same shipment of merchandise, 

Parmalat could create the impression that its accounts receivable were much larger than 

they really were. One of the Parmalat executives who operated the scheme, Claudio 

Pessina, told Milan magistrates that as many as 300 people at Parmalat knew of it. But if 

anybody thought there was something wrong, they didn't say so publicly. 

As Parmalat expanded globally in the '90s, so did its network of bankers and financial 

advisers. Ferraris was one of them. Before joining Parmalat in 1997 as an executive in 

Canada and Australia, he worked for seven years at Citigroup in Milan — and made 

regular sales calls on Tonna. "There was big competition" for Parmalat business, Ferraris 

says. At the time, U.S., British and other European investment banks were piling into 

Italy trying to grab local business, and Tonna played hard to get. "You needed to come up 

with a product that really interested them," Ferraris recalls. For Citigroup, Ferraris 

scored what were seen as two coups: an early version of the securitization program — by 

which the company's receivables were packaged as debt instruments and sold to 

investors — and a retainer to advise Parmalat in the acquisition of Beatrice Foods in 

Canada, a transaction valued at $310 million. 

Ferraris also laid the groundwork for a complex financing scheme through a Delaware 

company called Buconero, the Italian for "black hole," which Citigroup set up for 

Parmalat in 1999. Buconero loaned a total of $137 million to a Swiss subsidiary of 

Parmalat that then distributed the money to other Parmalat companies. Buconero 

received a guaranteed return of almost 6%, plus a total of about $7 million in fees for 

Citigroup. In his lawsuit against Citigroup, which seeks a whopping $10 billion in 

damages, bankruptcy administrator Bondi alleges that Buconero was used to dress up 

debt as an equity infusion, and says the bank must have known about Parmalat's true 

financial situation. Citigroup denies it, saying Parmalat was making use of a perfectly 

legal type of low-cost financing scheme employed by many other Italian companies. 

What's clear is that by the time it collapsed, Parmalat had established dozens of 

arrangements involving offshore companies — and banks earned huge commissions for 

helping it do so. An official accounting by Bondi shows that €6.5 billion — almost half of 

Parmalat's total debt — went to pay interest, commissions and Of that, €2.8 billion went 

to the banks alone. 

By 1995, Tonna and others have told magistrates, the company was losing more than

$300 million annually in Latin America alone. Parmalat decided to move some of its debt 

off the company's consolidated financial statements. It did so through three shell 

companies based in the Caribbean. These firms pretended to sell Parmalat products, and 

Parmalat would send them fake invoices and charge costs and fees to make the "sales" 

look legitimate. Then Parmalat would write out a credit note for the amount the 

subsidiaries supposedly owed it, and take that to banks to raise money. To make the debt 

disappear, Parmalat transferred the liabilities to off-book subsidi-aries, also based in 

offshore havens. Bondi, the bankruptcy commissioner, says the system was a lethal brew. 

"In an attempt to hide its state of insolvency," he said in a report, Parmalat "entangled 

itself in gran-diose financial operations that were ever more costly." 

"OFFENSIVE AND RIDICULOUS" 

By the end of the '90s, the first red flags began popping up. In late 1999, Esteban Pedro 

Villar, a partner in the Buenos Aires offices of accountants Deloitte & Touche, filed an 

internal "early warning report" expressing serious concerns about Parmalat's Latin 

American operations. He peppered the company with so many questions that cfo Tonna 

lost his temper. The requests for information are "offensive and ridiculous," Tonna 

thundered in a June 9, 2000, fax to Adolfo Mamoli, the Deloitte partner in Milan, and 

terminated Deloitte's Parmalat business in Argentina. Deloitte — which had taken over as 

Parmalat's worldwide auditor only the previous year — quickly backed off. The accounts 

were certified and Mamoli sent a terse e-mail to his colleague Villar. "For the future," he 

wrote, before contacting Parmalat on any issue, "you should contact me in advance to 

discuss possible solutions." 

Other Deloitte partners also had serious concerns. In an audit report dated March 28, 

2003, Deloitte's Maltese office questioned a $7 billion intercompany transfer that is now 

known to have been fictitious. The Deloitte auditor in Brazil, Wanderley Olivetti, raised 

such a stink to the Milan office about Parmalat's Brazilian accounts that the matter went 

all the way up to Jim Copeland, then Deloitte's chief executive in New York City. "Sorry to 

trouble you this morning in a moment while you are clearly busy with other matters," 

Milan partner Mamoli wrote in a memo to Copeland, "but ... a major issue has now 

emerged." Olivetti's objections were waved off and he was eventually taken off the 

Parmalat account. Deloitte insists that it behaved properly; it points out that the 

investigation of Parmalat began only after Deloitte Italy, in October 2003, drew attention 

to irregularities in Parmalat's financial dealings. And it says auditors are often shifted 

from accounts for any number of reasons, although it's not known who was responsible 

for Olivetti's move.

In December 2002, a full year before the company collapsed, Joanna Speed, Merrill 

Lynch's food industry analyst in London, became the first big bank analyst to issue a 

"sell" recommendation on Parmalat stock; she found the accounts incomprehensible. 

Despite such misgivings, however, business continued as usual. Six months before the 

collapse, Kenneth Lewis, the chief executive of Bank of America, flew to Parma to pay a 

call on Tanzi. Ferraris recalls that the June 2003 meeting with Lewis was cordial. If the 

American had any concerns, he didn't raise them. "It was a marketing call," Ferraris 

recalls. "Lewis was saying, 'We'd love to do more business with you guys.'" The bank 

describes the visit as "a courtesy call" and says there were no substantive discussions 

about Parmalat's financial position. 

Traveling in the Gulfstream corporate jet with Lewis was Luca Sala, a managing director 

of Bank of America in Milan who worked closely on some of the bank's transactions for 

Parmalat. Less than a month later, the bank fired him for allegedly fiddling his expenses, 

so he immediately took a new job — with Parmalat. Ferraris says he needed Sala's help to 

understand a complex $400 million in financing provided by big institutional investors 

in the U.S. 

Sala, 40, has since confessed to magistrates that he received more than €20 million in 

commissions from Parmalat for helping to arrange some financing transactions. The 

money was paid into a Swiss bank account Sala had set up with a pseudonym. Most of it 

came from the refinancing of a 1999 Brazilian deal, under which Bank of America raised 

$300 million from U.S. investors to acquire a stake in Parmalat's Brazilian group. News 

of the transaction sent Parmalat stock soaring 17% in a single day, as investors were 

cheered by the idea that Americans were buying into the company. The transaction is 

now a central element of Bondi's case against the bank; he says it made a loan look like 

an equity infusion, a charge the bank denies. The refinancing was even more 

controversial: Sala admitted to skimming off a "commission" via the offshore company 

he'd set up to handle it. Bank of America says it didn't know that at the time. 

By mid-2003, such peculiar transactions had become too much for some big investors. 

When Bank of America was preparing a U.S. "road show" in July 2003 to present 

Parmalat's plans for a new issue, several institutional investors complained that the 

company had promised just three months earlier that it wouldn't be issuing new debt. 

Bank of America passed that information on to Sala, now working at Parmalat. "Many 

investors were puzzled," the message warned. Sala has been charged with market 

manipulation, along with two other former Milan-based Bank of America execs. One of 

them, Antonio Luzi, recounted to magistrates how Sala had given him a total of

$900,000 on three separate occasions for helping him set up the Brazilian refinancing. 

Luzi met him at a prearranged spot in the Swiss town of Lugano, handed him an empty 

briefcase, and waited. About an hour later, Sala returned with the case filled with cash. 

By now Parmalat's true debts were too big to hide. The beginning of the end came in 

1999, when Parmalat executives transferred the activities of the three shell companies to 

Bonlat, the Cayman Islands firm at the center of the fake Cuban milk scheme. By 2002, 

Bonlat's fictitious assets had grown so enormous — up to $8 billion — that the company 

had to invent a Cayman Islands-based investment fund called Epicurum to take over 

some of its fictitious credits. Epicurum soon attracted the attention of auditors and Italy's 

stock market regulator in November 2003. Within a month, the whole scam imploded. 

A LEGAL MORASS 

Today there are multiple legal skirmishes between what is left of Parmalat and its 

onetime financial partners. Magistrate Francesco Greco's criminal probe has already 

widened beyond individuals: last month, he broadened his investigation to include 

Citigroup, UBS, Deutsche Bank, Morgan Stanley and Italian fund-management firm 

Nextra Investment Management; Bank of America and the two auditors, Deloitte and 

Grant Thornton, were put under investigation earlier in the year. Bondi has filed civil 

suits in Italy and the U.S. against many of the same firms, alleging that they knew about 

and helped to camouflage Parmalat's shaky financial situation and thus contributed to its 

collapse. 

The auditors and banks vehemently reject the allegations. They say they were tricked — 

and are the biggest victims of the firm's collapse. Bank of America has already written off 

$425 million, while Citigroup puts its total Parmalat exposure at $540 million. The two 

banks are leading a counterattack against Bondi in bankruptcy court, arguing that there 

is no legitimate reason why their claims as creditors should be cut out. Even the U.S. 

government has jumped in. Scott Kilner, minister counselor for economic affairs at the 

U.S. embassy in Rome, says his office has been following the Parmalat scandal closely. 

"We want to be sure that in this case, like in others, U.S. companies are receiving fair and 

equal treatment," he said. 

As for Parmalat's own management, while many executives have acknowledged to 

magistrates that they played a role in the fraud, most point the finger at Tanzi as the 

mastermind. Tanzi, however, blames others, particularly Tonna. If found guilty, both 

men could face jail sentences of five years or more. While some of the Parmalat 

executives were jailed during the initial investigation, all have since been released

pending trial. 

Ferraris is in trouble primarily because of that presentation he made to investors in 

Milan. Magistrates in that city have charged him with disseminating false information. 

Ferraris also worked on several financing deals in Parmalat's last few months, including 

with UBS, Morgan Stanley and Nextra, which are under criminal investigation. 

As he awaits trial, Ferraris says he still can't come to terms with the whole affair. Asked 

what he thinks about Tanzi, he says, "I have a problem. I believed so much in Tanzi as an 

entrepreneur that I have a hard time seeing him as anything else. For 13 years I think he's 

a genius, and then I find out he's a crook. If I'd known, I'd have stayed in Australia." 

This article appears in the January 16, 2004 issue of Executive Intelligence 

Review. 

The Story Behind Parmalat's Bankruptcy 

by Claudio Celani 

The bankruptcy of the giant food company Parmalat, warned Italian Finance 

Minister Giulio Tremonti on Dec. 22, runs the risk of leading to "general corporate 

insolvency" in Italy, if there is a run on corporate bonds. Throughout Europe, 

financial operators are nervous about the enormous sums of fraudulent financial 

paper that went up in smoke—and about where the trail of criminal investigation will 

lead. A senior European financial source, for example, told EIR that Parmalat's 

collapse throws a spotlight on the huge volume of dirty deals that are being run by 

top international banks through offshore centers such as the Cayman Islands. 

These deals are often used to finance political, illegal, or high-risk speculative 

efforts, he said, and the Parmalat scandal could expose this entire dirty substructure 

of the global financial system, with unforeseeable financial as well as 

political consequences. 

Parmalat is the largest Italian food company and the fourth largest in Europe, 

controlling 50% of the Italian market in milk and milk-derivative products. Suddenly, 

it was discovered that its claimed liquidity of 4 billion euro did not exist, and that 

EU 8 million in bonds of investors' money had evaporated as well. Parmalat is the 

largest bankruptcy in European history, representing 1.5% of Italian GNP— 

proportionally larger than the combined ratio of the Enron and WorldCom 

bankruptcies to the U.S. GNP. 

Behind Parmalat's facade as a productive agro-industrial company with 34,000 

employees, hides a giant financial speculative scheme to lure investors' money and

syphon it off through a network of 260 international offshore speculative entities, 

where the money disappeared. It has been reported that at the receiver-end of that 

scheme, the Cayman Islands-based offshore entity called Bonlat had invested $6.9 

billion in interest swaps, the highest-risk derivatives operations. So far, through this 

scheme, at least EU 8 billion have disappeared, but the figure is provisory. 

It is now being discovered that over the years, Parmalat had become a tool of the 

banks, which had invented, built up, and managed the speculative scheme. Which 

banks? The list currently investigated by prosecutors in Parma and Milan reads like 

the Burke's Peerage of the international financial system: Bank of America, Citicorp, 

J.P. Morgan, Deutsche Bank, Banco Santander, ABN; it goes on with all the largest 

Italian banks: Capitalia (Rome), S. Paolo-IMI (Turin), Intesa-BCI (Milan), Unicredito 

(Genoa-Milan), Monte dei Paschi (Siena), to name just a few. 

How It Developed 

The story began in 1997, when Parmalat decided to become a "global player" and 

started a campaign of international acquisitions, especially in North and South 

America, financed through debt. Soon, Parmalat became the third largest cookiemaker 

in the United States. But such acquisitions, instead of bringing in profits, 

started, no later than 2001, to bring in red figures. Losing money on its productive 

activities, the company shifted more and more to the high-flying world of derivatives 

and other speculative enterprises. 

Parmalat's founder and now former CEO Calisto Tanzi engaged the firm in several 

exotic enterprises, such as a tourism agency called Parmatour, and the purchase of 

the local soccer club Parma. Huge sums were poured into these two enterprises, 

which have been a loss from the very beginning. It has been reported that 

Parmatour, now closed, has a loss of at least EU 2 billion, an incredibly high figure 

for a tourist agency. 

The losses of the Parma soccer club are not yet fully known. Here, Parma insiders 

are pointing at what they call the "Medellín Cartel" connection—i.e., the purchase of 

overpriced Colombian soccer players, and other extravagances. While 

accumulating losses, and with debts to the banks, Parmalat started to built a 

network of offshore mail-box companies, which were used to conceal losses, 

through a mirror-game which made them appear as assets or liquidity, while the 

company started to issue bonds in order to collect money. The security for such 

bonds was provided by the alleged liquidity represented by the offshore schemes. 

The largest bond placers have been Bank of America, Citicorp, and J.P. Morgan. 

These banks, like their European and Italian partners, rated Parmalat bonds as 

sound financial paper, when they knew, or should have known, that they were worth 

nothing. While Bank of America has participated as a partner in some of Parmalat's 

acquisitions, Citicorp is alleged to have built up the fraudulent accounting system. 

What strikes one is not only the dimension of the scheme, but the arrogance of its 

authors. For instance, one of the offshore mail-box firms used to channel the 

liquidity coming from the bond sales was called Buconero, which means "black 

hole"! Appropriately, the first class-action suit in the United States on the Parmalat

case, filed by the South Alaskan Miners' Pension Fund, is against Parmalat, its 

auditors, Bank of America, and Citicorp—and focusses on Buconero. "The Parmalat 

fraud has been mainly implemented in New York, with the active role of the Zini 

legal firm and of Citibank," said San Diego lawyer Darren Robbins, a partner in the 

firm Milberg Weiss Bershad Hynes & Lerach, which is leading the class-action suit. 

"We believe that Citigroup, by creating instruments like the sadly famous 

'Buconero,' has played a fundamental role in helping Parmalat to fake their balance 

sheets and hide their real financial situation." 

The New York-based Zini lawfirm named by Robbins, has played a role which 

seems to have come out of the movie The Godfather. Through Zini, firms owned by 

Parmalat have been sold to certain American citizens with Italian surnames, only to 

be purchased again by Parmalat later. The whole operation was fake: The money 

for the sale in the first place came from other entities owned by Parmalat, and it 

served only to create "liquidity" in the books. Thanks to that liquidity, Parmalat could 

keep issuing bonds. Mafia? Former CEO Tanzi declared to prosecutors in Parma 

that the fraudulent bonds system "was fully the banks' idea." Parmalat's former 

financial manager, Fausto Tonna, counterfeited Parmalat's balance sheets in order 

to provide security for the bonds, but "it was the banks which proposed it to Tonna," 

Tanzi declared. 

Tanzi's version has been so far confirmed by Luciano Spilingardi, head of Cassa di 

Risparmio di Parma and member of the Parmalat board. Bond issues were ordered 

by the banks, Spilingardi said to prosecutors, according to leaks published in the 

daily La Repubblica. "I remember," Spilingardi says, "that one of the last issues, of 

150 million euros, was presented to the board meeting as an explicit request by a 

foreign bank, which was ready to subscribe the entire bond. If I remember correctly, 

it was Deutsche Bank." Spilingardi says that he expressed "perplexity" about the 

proposal, because a previous bond issue of EU 600 million had failed, in the Spring 

of 2003, causing a 10% fall of Parmalat stocks in one day. But the request was 

accepted, and the last Parmalat bond, issued in Summer 2003, made its way to the 

Cayman Islands black hole. At the moment of Parmalat's default, in December 

2003, the financial manager of Parmalat was no longer Tonna, who had left after 

the failed bond issue in the Spring. He has been replaced by Alberto Ferraris, who 

comes from ... Citibank. In June 2003, before the last bond issue "ordered" by 

Deutsche Bank, Parmalat's board gained a new member: Luca Sala, a top manager 

coming from ... Bank of America. 

The Parmalat crisis finally broke out on Dec. 8, when the company Parmalat 

defaulted on a EU 150 million bond. The management claims that this was because 

a customer, a speculative fund named Epicurum, did not pay its bills. Allegedly, 

Parmalat has won a derivatives contract with Epicurum, betting against the dollar. 

But it was soon discovered that Epicurum is owned by firms whose address is the 

same as some of Parmalat's own offshore entities. In other words, Epicurum is 

owned by Parmalat. 

On Dec. 9, as rumors spread that Parmalat's claimed liquidity was not there, 

Standard & Poor's finally downgraded Parmalat bonds to junk status, and in the 

next few days, Parmalat stocks fell 40%. On Dec. 12, the Parmalat management 

somehow found the money to pay the bond, but on Dec. 19 came the end: Bank of

America announced that an account with allegedly $3.9 billion in liquidity, claimed 

by Parmalat at BoA, did not exist. In one shot, the bankruptcy was revealed, and 

Parmalat stocks fell an additional 66%. Later, Tonna would confess that he had 

faked BoA documents, using a scanner, scissors, and glue, to "invent" such a $3.9 

billion account, a version which is still the official one. 

'Systemic Risk' 

On Dec. 22, the Italian government rushed through emergency legislation aimed at 

allowing quick bankruptcy procedures for Parmalat, in order to protect its industrial 

activity, payrolls, vendors, etc., from creditors' claims. The government appointed 

Enrico Bondi to present a reorganization plan by Jan. 20. So far, so good. But 

Bondi, who had already replaced Tanzi a few days before, has two loyalties: he was 

appointed by the government, but he is also a man trusted by the banks, including 

for his reorganization of the Ferruzzi-Montedison group, which was eventually sold 

to the Agnelli group. Fears are that Bondi will obey the banks, which want to chop 

up Parmalat and sell it in pieces—the plan feared by the trade unions and, at least 

publicly, by the government itself. 

That same day, Paolo Raimondi, head of the Italian LaRouche movement, issued a 

statement in which he said that the Parmalat bankruptcy, like the Cirio, Enron, and 

LTCM cases, "are not isolated cases in an otherwise functioning system. Instead, 

they are the most evident manifestation of the bankruptcy of the entire financial 

system." After pointing to the role of derivative speculation in the Parmalat case, 

Raimondi stressed that Citigroup and Bank of America, Parmalat's main financial 

partners, are "the number two and three among banks involved in derivatives 

operations." 

Because it is not just a firm at stake but the whole system, "the solution must be a 

global one," Raimondi said, pointing to Lyndon LaRouche's proposal for a world 

financial reorganization called a New Bretton Woods. "The Italian Parliament has 

already discussed, in the past, a series of motions on the New Bretton Woods, 

which were introduced on different occasions by Senators Pedrizzi and Peterlini, 

and by Representative Brugger, and received support from a hundred members of 

Parliament, from all parties." Raimondi also called the recent statement by "a high 

moral authority, such as Milan Cardinal Dionigi Tettamanzi, who, presented with the 

New Bretton Woods proposal, said that the Italian government not only can, but 

must, promote it." Over Christmas, this statement was circulated in Italy, and 

distributed in Parma by LaRouche Youth Movement organizers. 

The Italian government is aware of the systemic dimensions of the crisis, at least as 

concerns the Italian bond market, as Minister Tremonti's Dec. 22 statement about 

"general corporate insolvency" shows. "Do you have any idea," said Tremonti to his 

colleagues, "of what would happen if the market demanded liquidation of money 

invested in corporate bonds? Therefore, we must quickly review current legislation 

protecting investors." 

Tremonti referred to 100,000 Italian owners of Parmalat bonds, mostly families 

which have been advised by their banks to buy paper which is now worth nothing. 

This is the third large insolvency hitting Italian investors in one year: The first, the

Argentinian insolvency, wiped out EU 12 billion euro in bonds owned by 450,000 

Italians; then, the bankruptcy of Cirio, another food company, meant a default on 

EU 1.2 billion in bonds owned by 40,000 families. Panic is already spreading, and a 

run on the Italian bond market is on the horizon. Bank stocks have plunged, with 

Capitalia, the main Italian creditor of Parmalat, having lost 40% since Dec. 4. 

The red thread of this catastrophe is represented by the role of the banks. Italian 

banks, not unlike their international colleagues, have lured unaware customers into 

high-risk investments—workers, pensioners, and professionals who, in most cases, 

did not know where their money was invested, or who were fraudulently told that it 

was "safely" invested. 

In the Argentinian bonds case, consumer organizations have filed a legal action 

against the banks, because they failed to inform customers, as prescribed by law, 

that the investment was a high-risk one. In the Cirio case, it came out that on the 

eve of the company's insolvency, creditor banks rushed to dump their Cirio bonds, 

by selling them to their customers! And Italian newspapers are now publishing 

letters by owners of Parmalat bonds, telling how they were still being sold such 

bonds by their banks on Dec. 11, two days after the first Parmalat default, and after 

Standard & Poor's had downgraded them to "junk" status! 

The role of the banks, and of their putative supervisor, the Bank of Italy, has been 

the issue of an all-out war between Tremonti and BoI Governor Antonio Fazio, since 

the Cirio default. Things have now escalated, as the failure of BoI supervision in the 

Parmalat case is dramatically evident. Beyond the power struggles which are also 

involved, the real issue is, who controls the Bank of Italy. The fact is that the central 

bank, which is supposed to exercise control over the banking system, is itself 

controlled by the banks, which are its shareholders! 

The Italian central banking system is not dissimilar to the U.S. Federal Reserve or 

other central banking systems. Under the Bretton Woods system of regulations, 

however, it was partially under government control. This changed first in 1979, 

when deregulation freed the central bank from the obligation to buy government 

debt, and finally after 1992, when the largest shareholders of the Bank of Italy were 

privatized. These are Banca Commerciale (now Intesa-BCI), Credito Italiano (now 

Unicredito), IMI (now S.Paolo-IMI), and Banca Nazionale del Lavoro. The reader will 

recognize the names of some among Parmalat's main creditors and bond-placers. 

These are the controllers of the Bank of Italy, which the BoI is supposed to control. 

In the past months, Tremonti has led an unsuccessful battle to change this, by 

attempting to introduce local government representatives onto the boards of the 

Banking Foundations, which control Italian banks. Through that move, Tremonti 

hoped also to gain a handle on banking decisions to finance, for instance, 

infrastructure investments. He lost that battle, due to the staunch opposition of the 

Bank of Italy. 

But now the issue is again on the table, and decisions are expected to be taken 

after a parliamentary committee, set up after the Parmalat case broke, has 

investigated the current state of relations between the banking system and the 

corporate world. On Jan. 8, a government initiative is expected on a new control

authority, which is supposed to assume the supervisory powers which the Bank of 

Italy had, but never implemented. 

http://www.accountancyage.com/accountancyage/analysis/2144106/parmalat-case-highlightscrisis 

Parmalat case highlights crisis of confidence 

As the former head of Parmalat goes on trial to face fraud charges, there are renewed calls for reform of 

Italian corporate law and its financial institutions - from the top of government down 

Written by Teresa Reilly 

Accountancy Age, 13 Oct 2005 

In 1992 Milan became the centre of a clean-up operation among the country’s political class known as 

tangentopoli or bribesville. Policemen and public prosecutors embarked on ‘Operation Clean Hands’ in the 

Lombardy capital and kept court hacks in copy for months. 

At the end of September 2005, more than a decade later, the Italian media was again poised for equally 

pencil-shaking revelations in the Milan trial of Calisto Tanzi, founder and former head of the dairy foods 

giant Parmalat. 

The list of fellow defendants reads like a who’s who in corporate finance – Deloitte & Touche, Grant 

Thornton, Bank of America. Add incandescent shareholders to the courtroom chaos, which opened and 

adjourned on September 29, and the atmosphere was understandably tense. 

The collapse of the Parma-based firm, with debts of €14.3bn in 2003, has left Deloitte Italy, the Italian arm 

of the parent firm and the former Italian affiliate of Grant Thornton, Grant Thornton SpA (now known as 

Italaudit SpA, following a parting of the ways with the firm), facing accounting fraud charges. 

They are accused, as primary and secondary auditors respectively, of aiding Parmalat’s top managers to 

keep the dire state of the firm’s affairs under wraps. 

Professor Francesco Galgano of the University of Bologna, a member of the commission that pushed 

through a bi-partisan reform of Italian company law, says legislative changes regarding corporate crime 

have moved Italy into line with English practice. ‘Liability for criminal offences by companies, which has 

existed in Great Britain since 1950, was brought into Italian law several years ago,’ he says. ‘Therefore, 

even accounting firms will be subject to penalties or penal sanctions.’ 

Elio Lannutti, president of Adusbef, a national association that protects consumers’ rights in the financial 

services sector, estimates that if Tanzi and company are convicted, they may face five years in prison. 

Lannutti believes Italy’s law-makers should be looking to the US for a lesson in how to deal with corporate 

misdemeanours. 

In the US in 2002, six months on from the Enron fall-out, Congress passed the Sarbox legislation which 

imposes 12 to 25 years in prison for accounting fraud. 

In contrast, around the same time, Italian Prime Minister Silvio Berlusconi was decriminalising false 

accounting in private companies and, alleged his detractors, in the process saving himself from prosecution.

Galgano, an expert in business law, puts things more technically. ‘False accounting was the subject of 

legislative reform in 2002, but the crime had not already been de-penalised, only diversely regulated,’ he 

says. 

In the wake of Parmalat-type collapses there is a definite crisis of confidence among Italians. Giorgio 

Benvenuto, who sits on the all-party finance commission in the lower house of the Italian Parliament, 

maintains the scandal saddles home-grown business with ‘a weathered calling card’. The image of Italy 

abroad has been tarnished in the past two years,’ comments the Social Democrat MP. 

Benvenuto says that an important step to restoring Italy’s profile overseas must include an overhaul of the 

country’s financial institutions. Starting, he argues, with the role of the governor of the Bank of Italy (Banca 

d’Italia). Antonio Fazio, the present incumbent, has sole responsibility for monitoring the nation’s banking 

activities. 

‘As the systems of vigilance stands, the bank cannot keep up with the pace of change on the Italian and 

global financial markets. The governor, whatever their economic pedigree, cannot make things work 

efficiently on his own,’ he argues. 

Until law changes made in June this year, Fazio had exclusive access to information from the bank’s central 

risk assessment centre (Centrale Rischi), which records movements, abroad and at home, between banks 

and Italy’s listed companies. 

When the public prosecutor’s office in Milan sent its technical consultant, Dr Stefania Chiaruttini, to pore 

over the Parmalat records, she reported: ‘The central risk assessment centre and the data-banks 

(Bondware and Bloomberg) highlighted that the overall debts far exceeded what was recorded in the 

accounts’. Benvenuto believes the bank has too much power and too little success in preventing cases 

such as Parmalat: ‘Whoever wants to defraud and get past the bank’s controls, can do so,’ she says. 

The debate as to who is to blame for Parmalat going sour continues. The parliamentary opposition opines 

that Berlusconi’s stop-and-start approach to reforming investment laws was at fault. Adusbef’s Lannutti 

takes issue with Bank of Italia chief Fazio for allegedly failing to pick up on the company’s false invoices. 

Deluded shareholders vent their anger at Tanzi for turning their nest-eggs into nightmares. 

Last week, the resurrected Parmalat re-entered the Italian stock market on a high, only for shares to be 

suspended as figures spiralled downwards in the wake of investors selling rather than buying. In the same 

period, Pamalat’s administrator, Enrico Bondi, announced the firm would be filing further compensation 

claims. The Milan trial resumes on 2 December 

_____________________________________________________________________

http://ivythesis.typepad.com/term_paper_topics/2009/09/case-analysis-of-the-failure-ofcorporate-governance-in-a-major-corporation-company-parmalat.html 

Case analysis of the failure of corporate governance in a major corporation 

(Company Parmalat) 

Three Pillars of Effective Corporate Governance 

Internal Corporate Governance 

Internal corporate governance refers to the methods that enable shareholders to 

implement management control. These comprise the sufficient organization of the board of 

directors, effective arrangements for the exercise of shareholder rights, and a properly 

designed internal audit function. Regarding the responsibility of the board, the competence 

and efficiency of management should be promoted and monitored by an autonomous body 

inside the board. To guarantee the effective implementation of the shareholders rights, all 

relevant information must be adequately accessed. Proper arrangements for shareholder 

communication and decision-making is also important. Internal processes and controls should 

be examined, a task that must be performed by the external audit. The internal audit does not 

posses a legally approved role and authorization so it is up to the management to define its 

roles and supply it with the appropriate role. 

External Corporate Governance 

External corporate governance is about the control function that financial markets 

perform. Primary markets are very important because they give direct access to corporate 

financing. The key investors must be adequately informed. Sufficient investor information is a 

crucial issue on the secondary markets. Financial and reputational intermediaries contribute to 

corporate governance. 

Transparency and Disclosure 

Transparency and disclosure link internal and external corporate governance. External 

audit plays an important part in transparency and disclosure. It is essential that the external 

auditors are competent and independent and must be able to prevent or manage disagreement 

if interest. 

The Case of Parmalat 

In 2003, Italy witnessed the collapse of one of its most famous companies, Parmalat. 

Amid allegations of huge corruption involving fraud and cooking the books to hide a 

$4billion black hole in the accounts, senior members of the founding family now sit in Milan 

jails awaiting trial. As a company that employed 36,000 employees in 126 factories in 30

countries the fall out on investors and staff has been immense (2005). The scandal at Parmalat 

was largely caused by questionable practices, bad management and weak internal controls ( 

2005). The collapse of the Parmalat food empire exposes the disturbing aspect about Italian 

Capitalism – the lack of effective financial control over its family owed companies (2005). 

The Parmalat situation started out as a standard accounting fraud. Managers allegedly used 

various accounting tricks to avoid disclosing sizeable losses, possibly with the involvement of 

at least some auditors and lawyers. The Parmalat group, a world leader in the dairy food 

business, collapsed and entered bankruptcy protection in December 2003, after 

acknowledging massive holes in its financial statements ( 2005). 

Origin of the Parmalat Scandal 

One of the major corporate scandal that led to the development of Corporate 

Governance involved Parmalat, a multinational food and dairy company based in Italy. It has 

been reported that in Novemver 2003, Parmalat failed to repay a € 150 million bond despite 

apparently large amounts of cash and liquid assets on its balance sheet. This was followed by 

the statement released by the Bank of America in December 2003, stating that a document 

claiming to show forgery of a large account of a Parlamat subsidiary at Bank of America. As 

a result, a € 3. 95 billion black hole surfaced in Parlamat’s accounts. December 27, 3003 

marked the declaration of Parlamat’s collapse. In January 2004 the new administration of 

Parlamat declared that the company’s debt was over €14 billion (). 

Parmalat’s Corporate Governance Issues 

Board Composition and Independence 

When Parmalat was listed in 1990, the board was composed of nine executive 

directors and four non-executive directors. One of these was a member of the Tanzi family. 

The composition of the board was influenced by the fact that 51% of the shares were 

controlled by the Tanzi family. This guaranteed the appointment of Calisto Tanzi as both the 

Chairman of the Board and the Chief Executive Officer of the company. The composition of 

the board revealed the appointment of the management team where in majority of the 

members either belonged to the Tanzi family or people with close ties to the Tanzi (). 

Accounts: Auditing and Disclosure 

Parmalat changed auditors from Grant Thorton to Delloitte and Touche. Grant Thorton 

recommended that Parmalat spins off its travel concern and a small number of other 

businesses, and allow these to remain under its watch. Parmalat followed this suggestion and 

maintained a fair degree of propriety in its main division, which was monitored by Delloitte 

and Touche, and used the subsidiaries to create illegal payments to the parent company. The 

executives produced debts owed to Parmalat by the subsidiaries, and the latter crafted forged 

accounts to pay the debts. The auditors of Grant Thorton then presented records of these

transactions to Deloitte and Touche, who rubberstamped most of them. The subsidiaries’ 

auditors also conspired with the executives in other frauds like the “cut and paste” forgery and 

falsifying of sales figures (). 

Internal Control Procedures 

The hindrance in internal regulation at Parmalat was caused by the fact that more than 

half of the Board’s members are executive directors. This also hindered effective performance 

and independence of Board Committees. Members of Audit and Remuneration Committee 

also sat on the Executive Committee with founder and boss Tanzi. The Executive Committee, 

which consisted of company executives, proposed actions for Board approval and then 

implemented them (). 

The Characteristics of the Italian Corporate Governance 

1. Italian firms depend heavily on bank finance 

2. Banks have never played an important role in the corporate governance of firms 

3. Financial markets have historically been shallow and small 

4. Ownership and control are concentrated 

5. The role of the state is important 

6. Groups of firms are very widespread and used as a mechanism to separate ownership and 

control 

7. There are conflicts of interest between minority and majority shareholders 

8. Boards of directors play a limited role 

9. The market for corporate control is not active 

10. Hostile takeovers are difficult and unlikely 

The possible way to separate ownership and control has not been based on a unique 

model but on a set of different models: the system was self-organizing given the fact that in 

Italy there has been a law on corporate governance issue. The model is actually based on the 

following devices: 

1. Hierarchical Group 

The most frequent corporate governance model; it accounts for 52 per cent of 

manufacturing activity and is more frequent among larger firms. 

2. Family Control 

The second most relevant model. This is the case where family links exist among controlling 

shareholder.

3. Coalition Control 

Coalition control is a model quite similar to the previous but more complex. The trustlink 

between entrepreneurs and investors is based on their sharing common values. 

4. Financial Supervision 

Financial guarantees to non-controlling shareholders are represented by the presence 

of financial companies with privileged information exerting monitoring. 

The ownership and control structure of Italian listed companies is characterized by a 

high level of concentration, and by the presence of a limited number of shareholders, linked 

by either family ties or agreements of a contractual nature, who are willing and able to wield 

power over the corporation ( 2005). Parmalat was a complex group of companies controlled 

by a strong blockholder (the Tanzi family) through a pyramidal device ( 2005). The 

monitoring body that examines Italian listed companies includes two key gatekeepers: the 

board of statutory auditors and the external auditing firm. 

Parmalat’s Compliance with the Italian Code of Best Practice 

The Role of the Board of Directors 

Parmalat Finanziaria, the listed holding company of Parmalat group had complied 

with the recommendations made by the Preda Code (1999, 2002) since 2001 (2005). The 

Preda Code recommends that matters of special importance should be reserved for the 

exclusive competence of the board of directors. These include the examination and approval 

of the company’s strategic, operational and financial plans and corporate structure of the 

group, and the examination and approval of transactions having a significant impact on the 

company’s profitability, assets and liabilities or financial position, with special reference to 

transactions involving related parties (2005 ). 

The Composition of the Board of Directors 

The Preda Code (2002) recommends the board of directors to be composed of 

executive and non-executive directors. The non-executive directors should for their number 

and authority, carry a significant weight in the board’s decision-making process. Thirteen 

members composed Parmalat’s board of directors in 2003. Among the members of the board, 

five were to be considered as non-executive directors. The fact that non-executive directors 

are less than executive directors is rather unusual among Italian listed companies (2005). 

The Separation between the Chairperson and CEO positions

At Parmalat Finanziaria, the Chairman and Chief executive director positions were not 

separated. Both positions were held by . This situation led to a huge concentration of powers 

considering that the same person was the major shareholder of the company (2005). 

Appointment of Directors and Nomination Committee 

The Preda Code recommends companies to set up a nomination committee to propose 

candidates for election in cases when the board of directors believes that it is difficult for 

shareholders to make proposals. This may happen in cases when the corporate ownership and 

control structure is dispersed. Parmalat did not comply with this recommendation and 

explained that shareholders never faced difficulties in proposing candidates for elections. This 

may be considered an adequate explanation given the concentrated control structure of the 

company (2005 ).

After the Parmalat Storm

Create successful ePaper yourself

Delete template?

Save as template?