Parmalat Finanziaria S.p.A. and its subsidiaries manufacture food and drinks worldwide. Parmalat is one of the leading


Parmalat Finanziaria S.p.A. and its subsidiaries manufacture food and drinks worldwide. Parmalat is one of the leading firms in the long-life milk, yogurt, and juices market. The company became the world’s seventh-largest supplier of dairy products and Italy’s seventh-largest company, with 146 plants in thirty countries, employing 36,000 people worldwide. In 2002, the company reported €7.6 billion in annual sales. In late December 2003, however, Parmalat was placed under administration and declared insolvent.

Because of its size and its involvement with Special Purpose Entities (SPEs), offbalance-

sheet, and sham transactions, many regard it as Europe’s Enron. In January 2004, it was reported that the company

“had net debts of 14.3 billion euros

(US\($23.47\) billion) shortly before its crisis erupted... almost eight times the figure given by former managers.”2 PricewaterhouseCoopers also found that earnings for the nine months ended September 30, 2003, were only one-fifth of what had been reported, and bondholders were expected to recover under 7% of their capital. Parmalat’s failure is expected to have a stimulative effect on corporate governance reform in Europe for decades.

The company started in Parma, Italy, in 1961. By the 1970s, it had expanded to Brazil and later diversified into the pasta sauces and soups markets. In the 1990s, Parmalat’s need for cash made the company go public and sell 49% of its shares to be traded on the Milan Stock Exchange.

Calisto Tanzi, Parmalat’s founder, kept effective control of the company, and Tanzi family members held several key positions in Parmalat and its subsidiaries.

Parmalat’s series of acquisitions in the 1990s left the company with a reported

\($7.3\) billion of debt. The company acquired subsidiaries in Asia, southern Africa, and Australia as well as adding to its North and South American holdings and moving into eastern Europe. The acquisitions were done without planning. The company did not go through a process of consolidation.

Many investments were done to support the Tanzi family in areas unrelated to Parmalat’s core business, such as the acquisition of the soccer team Parma, A.C.;

investments in travel agencies and hotels;

and sponsorship of Formula 1 racing teams.

Over the course of more than a decade, Parmalat Finanziaria S.p.A. misrepresented its financial statements by billions of dollars.

The company’s founder and former CEO, Tanzi, now stands accused of market rigging, false auditing, and misleading investors and stock market regulators.3 Tanzi established a series of overseas companies to transfer money among and to conceal liabilities in order to give the illusion of financial liquidity within the Parmalat.

The scheme was eventually uncovered when the company was unable to make a bond payment and was forced to admit to having fraudulent assets on its accounts. The case raises a number of ethical issues that impact all stakeholders. The rights of shareholders were violated, and the expectations of stakeholders, with respect to the integrity of company management, were not met.


1. What conditions appear to have allowed the Parmalat situation to get out of control?
2. What specific audit procedures might have uncovered the Parmalat fraud earlier?
3. What audit steps should Deloitte have taken with regard to the seventeen offshore subsidiaries that continued to be audited by Grant Thornton?
4. What impact will the Parmalat fraud have on Grant Thornton and on Deloitte & Touche?
5. How did the following areas of risk in Parmalat’s control environment contribute to the fraud: integrity and ethics, commitment, audit committee participation, management philosophy, structure, and authority?
6. How did the following areas of risk in Parmalat’s strategy contribute to the fraud: changes in operating environment, new people and systems, growth, technology, new business, restructurings, and foreign operations?

7. Should the banks and other creditors be legally responsible for so-called irresponsible lending that contributes to higher than necessary losses? If so, how can they protect themselves when dealing with clients whose viability is in doubt?
8. Do you think that applying bankruptcy projection models should be a regular tool used by auditors, creditors, and regulators to assess the reasonability of a company’s financial statements?
9. Is independence important in corporate governance? What are the most recent rules on corporate governance for public firms?
10. Discuss which changes could be made to the Parmalat’s control system and corporate governance structure to mitigate the risk of accounting and business fraud in future years.

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Business And Professional Ethics

ISBN: 9781337514460

8th Edition

Authors: Leonard J Brooks, Paul Dunn

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