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Parmalt Case

Ethical Code Of Conduct


Introduction To The Organization

• Parmalat is a multinational Italian dairy and food


corporation.
• Italy’s 8th Largest Industrial company.
• The Parmalat Group is a global player in the production
and distribution of foods that are essential for everyday
wellness:
->milk, dairy products (yogurt, cream based sauces,
desserts and cheese) and fruit beverages.
• Generated revenues of about 5.2 billion Euros in 2012.
• About 16,000 people work at Parmalat’s facilities in
Europe, the Americas, Africa and Australia.
• The Group is present in 29 countries and has 70 factories.
Cont……
• Parmalat has a strong tradition of innovation and
develops products with a high value added to improve
the diet of its customers.
• The global brands of the Group are Parmalat for milk
and dairy products and Santàl for fruit beverages.
• It is in charge of almost 50% of the dairy products in
Italy.
• The company's founder and CEO is a man Calisto Tanzi,
he is the son of a man who ran a small bakery, but as
he grew old, he changed this to an international
business in 1961.
Products
Parmalat in Formula One
• Parmalat's name was notable outside Italy in Formula One.
• Its name was emblazoned on the cap of Niki Lauda, which he
always wore following his 1976 German Grand Prix accident.
• The Brabham Formula One team was sponsored by Parmalat
through some of its most successful years in the late 1970s and
early 1980s.
• Owned by Bernie Ecclestone, Nelson Piquet and the Brabham
team won two World Drivers Championships while sponsored
by Parmalat.
• It also sponsored Pedro Diniz throughout his Formula One
career.
• Its logo was seen on Forti, Arrows, Ligier and Sauber cars from
1995 to 2000.
Revenue by Region
PARMALAT ETHICAL CODE OF
CONDUCT
Parmalat’s Code of Conduct is divided into 3 parts-

• Mission and Values, which sets forth the fundamental principles of


the Parmalat corporate culture, there by creating the foundation for
appropriate implementation of individual policies and procedures.

• Rules of Ethics, which outlines the areas of responsibility and the


behavior that should be followed to remain consistent with the
Group’s values and stresses the importance of complying with
statutory requirements.

• Implementation, Control and Updates, which identifies the parties


responsible for implementing the Code of Ethics and explains in
practical terms how the Code’s values and rules should be
implemented and made part of daily practice.
PARMALAT SCANDAL IN BRIEF
• Parmalat is suspected of having perpetrated a
massive fraud. Billions of euros have gone missing
from its books in a scandal that has drawn
parallels with the collapse of Enron, the US
energy giant.
• Parmalat finances were in poor shape by the late
1980s as a result of disastrous foray into
television.
• In 1987,it spent Euro 130mn on a station called
Odean T.V which collapse after 3 years.
• In 1997, Company entered into financial market
by various acquisitions.
Cont……….
• By 2001, many of the acquisition were producing
losses, then company start using derivatives.
• In early 1993 Parmalat began to invent financial
transactions to pad its balance sheet.
• It posted profits by fictitious transactions and
aggressive acquisitions.
• In Feb 2003, CFO announced issue of bond of 500
million euro, which raised the question against
company debt payment.
Cont……..
• The core of the fraud was system of double billing
to Italian supermarkets and other retail
customers.
• They simply done billing twice for the same
shipment of merchandise.
• They created the impression that their account
receivables were much larger then they really
were.
• From about 1990-2003 Parmalat borrowed
money from global banks and justified those
loans by inflating its revenues through fictitious
sales.
Cont…..

• CFO Fausto Tonna resigned and replaced by Alberto


Ferrasis.
• In Sep 2003,fund raising effort of 300 million euro was
dropped.
• Company share was depreciated significantly as a result
raised over transaction with mutual fund Epicurum.
• The company not able to pay debt of 150 million euro.
• Tanzi resigned as chairman and replaced by Mr. Bondi.
• Bank of America release a document showing 3.95billion
euro in Bonlat’s bank account as a forgery.
CORE ISSUES THAT ARE VIOLATED
• Parmalat lacked board independence.
• Parmalat is family owned company of Tanzi and Sons, Tanzi is the
founder ,chaiman and CEO of the company.
• Parmalat was also weak on the composition of key board
committees.
• Parmalat does not have sufficient no. of independent director as
per the SOX (Sarbanes–Oxley Act of 2002).
• Both audit committee and remuneration committee is completely
dependent on Tanzi family.
VIOLATION OF LAWS
• The responsibility of both chairman and CEO is
not different.
• The holding company controls majority of
voting rights which ultimately belongs to the
Tanzi family.
• To save from Bankruptcy Tanzi sold Parmalat
to a dormant holding company listed in Milan
stock exchange.
Cont…..
• Wrong disclosure of financial report. The company was facing
debt which is more than double what was disclosed in financial
report.
• As per SOX, board should have more than 50% independent
directors. But in Parmalat, the board was composed of 3
independent directors remaining are executive directors out of
which only one is independent director.
• Lack of monitoring company operation by the board of directors.
• Parmalat had 3 internal auditors which were appointed by
company and neither of them appointed by minority
shareholder in order to protect their rights.
• Lack of rotation of external auditor, as per Italy corporate
governance external auditor should be rotated after 3 years
Roles of Senior Management In Fraud
Chairman and CEO: Calisto Tanzi, who is the founder, chairman and CEO of the
company.
• No role distinction between CEO and Chairman.
• without understanding the company financial condition acquired many companies
in the food industry which result in financial losses.
• To hide losses they manipulate financial reports.
• Divert 500 million euro from company reserve to Parmatour(which belongs to his
daughter) without taking approval from shareholder and stakeholder.

CFO: Fausto Tonna


• Completely dependent on the company internal auditor, not even access company
books which was handled by internal auditor
• Announced a bond issue of 500 million euro, without communicating shareholder,
stakeholder and other personals.

Independent directors: Being independent directors of the company did not question
the company malpractices.
Cont…..
Internal Auditor
• Manipulation of balance sheet by reducing debt to half, in order to give company
better financial picture.
• In order to cover losses, post profit by representing that company involved in
aggressive acquisition.

External Auditor: Lorenz Penca of Grant Thornton auditor firm, remained chief
auditor for 9 years, even Italian government have role of rotation after 3 years.
• Not an independent director as related to one the company subsidiary.
• Also involved in company fraud and laundering activities.
• Company has nonexistent account in Bank of America. Grant Thornton claimed
that this account is existent in order to show third party confirmation.

Senior management: Did not perform efficiently to minimize the risk of company and
did not question activities of Executive Director.
Executive Directors: company had 7 executive directors, all of them equally involved
in company malpractice. They also received compensation for their involvement.
Institutional investors:
• Did not found the companies actual financial condition and invest 150 million
euro.
• Help the company to go public, raised fund from the market.

Bank of America, Citigroup and J.P. Morgan:


• Largest bond placers helping Parmalat to fake balance sheet and hide their actual
financial condition.
• Bank of America give higher rating to Parmalat bonds based on the fake account
which never existent.
• Citigroup and J.P.Morgan help Parmalat to build a fraudulent accounting practice

Deloitte and Toushe: Auditing firms


• Even after rotation of external auditor in 3 years, agreed to continue Lorenz
Prenca to be chief auditor of the company.
• Allow Parmalat to follow wrong accounting practice and help them to cover fraud.
• Regulators were also responsible as they are not able to detect pattern of
negligence and fraud.
FAILURE OF INTERNAL CONTROL MANAGEMENT
AND RISK MANAGEMENT
• Internal control and risk management are required to improve the quality of
financial reporting.
• These are mainly done by chief executive, chief finance officer and auditing
firms.

Parmalat code of conduct defines internal control and risk management as


follows:
• Verification of the internal control system is working effectively and support
the Board of Directors in defining guidelines for the internal control system. It
also supports the Chief Executive Officer in defining the tools and methods
needed to implement the internal control system.
• Risks entailed by identifying are adequately monitored and updated on a
regular basis, and negative elements that can threaten the organization’s
operational continuity must be assessed carefully and protections are
adjusted accordingly.
• In Parmalat scandal, each auditor, executive directors, senior management,
bankers and auditor firms are involved.
• This ultimately leads to failure of internal controls and poor risk management.
Key Issues
Ethical Issues
• The crimes that have been committed are not only illegal, but they go
against appropriate behavior, what has been done is completely wrong.
• They have not only lied and shown a form of dishonesty, but the
company has put a lot of people's careers at stake.
• The company as mentioned before, has made fake profits and built fake
subsidiaries in order to gain assets and increase accounts.
• They have put a lot of investors and many shareholders under pressure.
It does not only financially cause damage, but it shows how the
company's CEO lacks integrity and commitment.
• Tanzi has tried to go the easy way to earn profit, and unfortunately he
put not only himself but many of his colleagues, friends and family in a
big black hole.
• The BOD and CEO are lack in accountability, supervisory skills and
strategy formulation.
• Raised question like banks are diligent enough while dealing with
Parmalat.
• Role function and power of regulators are not sufficient enough to
monitors and enforce guidelines.
Key Issues With The Control
Environment
• The Board contained 9 Insiders and 1 Affiliated member and only 3
independent directors. The ability for the Board to work effectively was
minimised.
• The members of the Audit and Remuneration Committee consisted of
Executives, the Owner and the CEO.
• There was reduced ability to independently challenge financial reporting and
audit outcomes.
• There was limited segregation of duties/authority/responsibility between the
executive and the Board.
• CFO (Alberto Ferraris) did not have access to key financial reporting systems
that were being handled by Chief Accounting Officer.

• There seems to be an absence of assessments of internal and external


factors before undertaking acquisitions using debts and derivatives.
Factors include production losses and issue of debt without
appropriate assets.
Key Issues with Control Activities

• The managers who were making the accounting


decisions, were also posting the journals to the general
ledger. (Segregation of duties)
• Same people were reviewing and signing off on the
reconciliations and reporting.(Segregation of duties)
• Inadequate validity checks to confirm accounts and
account balances , Reconciliations etc.
• System access controls were weak giving individuals
access to create and amend accounts and approve
transactions.
Information and communication

• There was restricted information available to the


CFO as he did not have access to the records.
• Limited reporting around the accuracy of the cash
balances.
• Inadequate systems and data validations for
completeness and validity. There were no checks
to confirm the accounts being created and
hidden.
Key Issues With Monitoring

• There was a lack of independent monitoring at


Parmalat. The boards were not truly independent and
not truly vigilant.
• The Audit and Remuneration Committee was
inadequately separate to challenge and review the
ongoing operations of executives and management.
• There is limited evidence of independent checks of key
controls such as independent reviews of reconciliations
and reporting.
The Outcome
• A fraud worth $ 8Bn.
• All changes in laws and governance are taken in accordance with the
fraudulent activities of Parmalat.
• The CEO Tanzi has been sentenced to 10 years in prison for fraud relating to
the collapse of the dairy group.
• The other seven defendants, including executives and bankers, were
acquitted.
• Another eight defendants settled out of court in September 2008.
• Shares in the company which once had a market value of €1.8bn, are
worthless, so millions of investors are out of pocket.
• Bank of America is thought to have provided between $150m (£84mn) and
$250mn in loans to Parmalat, those are trivial sums for America's third biggest
bank.
• In April 2011 after a three year trial, Milan court acquits four banks – Morgan
Stanley, Bank of America, Deutsche Bank and Citigroup of market-rigging.
• Prosecutors had demanded that €120m of the banks’ profits should be
impounded
FUTURE STEPS
• The auditors can be hired from a specific firm and be hired
under a contract, and there could be people alternating every
specified month.
• The Bank should be more precise when giving out loans to
businesses.
• The government should have strong corporate governance
measurement.
• Imposing strict regulation on independent directors, executive
director and auditors.

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