Introduction

Parmalat, before it was alternatively referred to as the Enron of Europe, began as

a family-run farm in Northern Italy that Calisto Tanzi inherited from his grandfather and

was known as Tanzi Calisto e Figli - Salumi e Conserve or "Tanzi Calisto & Sons - Cold

Cuts and Preserves". Producing processed meals like cured beef, seasoned ham, and

other such items was where it all began. But afterwards, Tanzi's entrepreneurial skills

and his exploration of new items propelled the company to new heights where the trip to

Switzerland, the place he saw a milk carton on a market shelf, served as the catalyst.

In 1961, Tanzi founded Parmalat, meaning ‘milk from Parma’ and was derived

from Parma that had a reputation in Italy on culinary excellence, which was very

successful throughout the years until it became a national brand due to the innovation of

its packaging, the Tetra Pak, a tetrahedron shaped carton and Ultra High Treatment

technique that prolonged the life of milk in the supermarket shelves.

Despite having a great start and reputation in the industry, in as early as the

1990s, Parmalat suffered from a debt crisis after an acquisition spree. In line with this,

at the height of Parmalat's success, the company's financial performance began to

decline due to corporate failure and unethical business practices composed of fraud and

collusion to cover up the company's shortcomings, rather than coming up with solutions.

In the 2000s, Parmalat took a dip when the business defaulted on a €150 million bond

issue despite having more than €4 billion and had 200+ companies in nearly 50

countries to its name. These factors greatly caused Parmalat to cry over its own spilled

milk.
 The purpose of this case study is to examine the factors that contributed to the

downfall of Parmalat. To further digest the case, it will discuss in detail the major and

minor problems that led to the one of the largest and most brazen corporate financial

frauds in history. After the identification of the problem, the paper will suggest alternative

courses of action, as well as the recommended changes to effectively deal with the

corporate failure and to prevent it from happening again in the future.

Problem

As described by the United States Security and Exchange Commission (SEC),

the Parmalat scandal is “one of the largest and most brazen corporate financial frauds

in history” (SEC, 2003), which caused ramifications around the world. As one of the

food giants and Italy’s eighth-largest industrial empire at the time, not only its own

collapse and founder Calisto Tanzi has been jailed awaiting formal charges (with nine

other executives likely facing indictments for corporate fraud), but several major players

from the world of international finance were also under scrutiny.

Jones (2011) also stated that Parmalat was a typical example of accounting fraud

that had taken place in modern day Italy, perpetuated by a weak corporate governance

structure and process, failure to exercise due professional care by the auditors, as well

as greed by the founder and top management team.

To further digest the case on how Parmalat spilled its own milk, the following

questions will be discussed: What happened to Parmalat? Who were the key players in
this case? How did they do it? What were the reasons that led to one of the biggest

corporate scandals? What are the measures that Parmalat should do to avoid the same

case in the future?

Major Problems

● Debt Crisis. Parmalat found itself thrust into the spotlight as a result of a major

financial scandal and a subsequent debt crisis— leading Parmalat to declare

bankruptcy.

● Corporate Failure. According to multiple investigations, Parmalat’s collapse was

linked to the company’s corporate governance failure and weakness which

involves a failure to implement an effective monitoring system, non-compliance

with Italy's corporate governance code, and an issue with the separation of

ownership and control, fueled by abuse and greed.

● Fraud

○ Double billing and inflating of invoices. Started in 1990, the executives

used a variety of unethical techniques to extend the fraud over a 13-year

period. As a way to increase their revenues and accounts receivable,

Parmalat used a double billing scheme.

○ Illegal alteration of financial statements. Parmalat spent time learning

different techniques to hide its debt and maintain outstanding financial

soundness to the eyes of consumers, banks, and investors by falsely

recording its financial statements.

 ○ Non-existing and forged financial account. Parmalat’s subsidiary in

Cayman Islands called the Bonlat Financing Corporation ("Bonlat") was

reported as a fake and forged account, by the Bank of America at the end

of 2002.

Minor Problems

● Poor Organizational Structure. The positions and functions of the Chair and CEO

of Parmalat were not separated and its non-executive directors lacked

independence.

Discussion

Key Players in the Parmalat Scandal

Behind the one of the largest and most brazen corporate scandals in history are

these people who played a huge role on Parmalat’s downfall:

Calisto Tanzi (Founder of Parmalat)

A businessman and entrepreneur who turned a northern Italian town family

business of selling prosciutto to a multinational dairy and food corporation and was

known as the founder of Parmalat. Mr. Tanzi was a visionary who saw potential in the

Tetra Pak packaging which prolonged the shelf life of milk and became the foundation of

global expansion. In addition, Mr. Tanzi was also an opportunist who capitalized on
marketing opportunities given by sporting events such as football, motor racing, and

skiing to further establish Parmalat’s status as a leading brand in Italy.

Fausto Tonna (Parmalat’s former Finance Director)

Served for 16 years as the finance director of Parmalat up until his resignation in

February 2003. Started doing clerk jobs in the early 1970s and slowly worked his way

up. He was also the former chairman of the Parma football team that the Tanzi family

acquired in 1990. During the time of the scandal, he was investigated by the Parma

Italian magistrates about his connection to the issue. Furthermore, an American banker

described Tonna having the “manners of a peasant” but a “sharp mind for figures.”

Which was confirmed during his arrest as his first public remark was towards the

journalist along with their families where he wished that they have a “slow and painful

death.”

Gian Paolo Zini (Outside Counsel for Parmalat)

Mr. Zini is a partner in the prestigious law firm Zini & Associates, with a

professional presence spanning Milan and New York. Notably, he has been under

suspicion as Italian and US authorities investigate charges that he assisted Parmalat in

avoiding Italian antitrust laws.

Lorenz Penca (Former Chief Auditor of Parmalat, 1990-1999)

 Mr. Penca was the first accused individual, along with Maurizio Bianchi, a former

Grant Thornton employee, to be sent for trial in the scandal. They chose not to

participate in the preliminary hearings that started on October 5.

Eventually, Grant Thornton was replaced by Deloitte & Touche because of an

Italian law that requires the rotation of company auditors. Grant Thornton continued to

be an auditor to Parmalat’s secretive Cayman Islands subsidiary, Bonlat.

Luciano Del Soldato (Parmalat’s Chief Financial Officer after Alberto Ferraris,

November 2003)

Mr. Ferraris had previously taken over as finance director in early 2003,

succeeding Mr. Tonna. However, on November 12, Mr. Ferraris resigned in the midst of

an investigation into Parmalat's participation in Epicurum, a Cayman Islands-based firm.

In this section, the following major and minor problems on the Parmalat scandal

will be discussed:

Debt Crisis

The problems which had bothered Parmalat since the early 2000s reached a

breaking point at the end of 2003. For over a year before the scandal erupted, some

analysts had been showing doubts about the excessive amount of debt the company

raised from the market, despite Parmalat’s financial statements showing substantial
cash reserves. Also, analysts show distress by the pattern of the business investing its

excess funds, frequently choosing little-known overseas funds. In late-2002, an analyst

named Joanna Speed at the well-known investment firm Merrill Lynch, prepared an

eighteen-page report on Parmalat, showing why should investors avoid the company’s

stocks. “The key issue which continues to perplex us is why the group (Parmalat)

continues to tap the market for relatively small, yet often quite complex debt issues,

when its cash pile continues to rise," wrote Speed. Several other analysts expressed

skepticism about Parmalat's financial systems as the report's effects grew more

widespread. Financial rumors started to spread regarding the company's complex

financial systems and high levels of debt. The Italian regulatory body Consob also

launched an investigation into Parmalat's annual reports and requested that the

business submit the work performed by its auditors in 2002 for confirmation. After the

auditors, Deloitte and Touche, raised concerns about the company's €500 million

investment in an unlisted mutual fund called Epicurum, based in the Cayman Islands, a

well-known tax haven, Standard and Poor also downgraded the company's credit rating.

Early in December 2003, when Parmalat was unable to accumulate the funds to

make a due bond payment of €150 million, the controversy burst into full force. Analysts

were surprised that the company was unable to raise the €150 million it claimed to have

in cash reserves because it was a relatively small amount. Officials from the company

claimed that it was only a short-term liquidity issue that would be resolved. Additionally,

Parmalat stated that the issue stemmed from its inability to withdraw money from

Epicurum. It requested its banks for assistance in resolving its liquidity crisis. As the

investigation progressed, it became increasingly evident that the intricate accounting

systems had been created on purpose by company officials and had been in use since

the late 1980s for at least 15 years. The company transferred money between its

various subsidiaries around the world using a complex system of bond and derivative

deals to construct a picture of the overall group's financial health. When the quarterly

results were announced, it used a regular system for fabricating accounts four times a

year. In order to serve as a routing agency for all of the company's international

transactions, a subsidiary called Bonlat was established in the Cayman Islands.

In the course of the investigation, Parmalat found itself thrust into the spotlight as

a result of a major financial scandal and a subsequent debt crisis. The company's

troubles came to light when it was revealed that a multinational corporation had

uncovered a massive debt hole, referred to as a "Buconero" or a Black Hole, amounting

to nearly €4 billion (equivalent to around $5 billion). The revelation shed light on a series

of deceptive accounting procedures used by Parmalat's management to conceal the

company's failing performance, which had been deteriorating since the 1990s.

In order to hide its failing financial state, Parmalat relied on increasingly illegal

techniques such as concealing debts, exaggerating profits, inventing assets, and

misleading current and potential investors about the company's true financial situation.

These activities developed a cycle of dependency and complacency, causing Parmalat

to amass an alarming debt of over €14 billion (nearly $18 billion) over time.

The weight of the increasing liabilities became intolerable, leading Parmalat to

declare bankruptcy. A dramatic decline in stock prices, a rock-bottom credit score, lost

connections with creditors and suppliers, major reputational harm, and numerous
instances of lawsuits and struggles awaited the company. Because of years of poor

management decisions, the debt crisis had a deep and fatal impact on Parmalat.

The incident had severe repercussions, forcing enormous measures to

restructure and reconstruct the corporation. Parmalat had to navigate the complexity of

bankruptcy proceedings, handle significant financial losses, repair damaged

relationships with stakeholders, face legal challenges, and embark on a difficult journey

to recover its soiled brand.

The Parmalat incident serves as an eye-opening example of how damaging it

can be to engage in fraudulent business practices and make poor business decisions. It

demonstrates the importance of being honest, acting ethically, and managing money

wisely in business.

Corporate Failure

The Parmalat scandal has been a case study by different authors who explained,

from different points of view, the reasons for the crisis focusing on the first cause of the

Parmalat financial fraud: the corporate governance system. Melis (2005) showed that

there was a huge concentration of power in a sole person in Parmalat. In fact, the

controlling shareholder was able to hold the positions of Chairman and CEO of

Parmalat Finanziaria. As Melis stated (2000) the high level of concentration of power in

non-financial listed companies is an Italian critical issue. Moreover, the author showed

that Parmalat Corporate Governance wasn’t able to comply with some of the key

existing Italian Corporate Governance standards of best practice, such as the presence
of independent directors, the composition of the board of directors, and, especially, of

the internal control committee. Buchanan et al. showed how Parmalat’s failure was

linked to “governance failures with particular reference to the conflict of interest between

the controlling shareholder and the minority shareholders”. The authors sentenced that

“the Parmalat bankruptcy was the result of the failed proper corporate governance, not

inevitable business decline”. McCahery and Vermeulen (2005) focused their paper on

Parmalat as it was an extremely unique case with reference to Special purpose entities

(SPEs). In fact “management used a virtual hydra-head of offshore subsidiaries and

special purpose entities to cover up their losses and prop up the financial situation of

the group”. Besides, the Parmalat scandal was used by the author to exemplify the

importance of the variety of legal techniques to curb related party transactions. Also,

Tabasso (2004) underlined that the Parmalat “fiasco” demonstrated the ineffectiveness

of prevention and controls in many critical areas of the corporate world, prompting a

serious reappraisal of self-regulation codes and legal standards.

One of the main issues that contributed to the Parmalat scandal was the

separation of ownership and control. The company's founder and principal shareholder,

Calisto Tanzi, held only a small percentage of the company's stock. Still, he had control

over the company through his position as chairman and CEO. This concentration of

power allowed Tanzi and a small group of executives to engage in fraudulent accounting

practices without being held accountable by the company's board of directors or

shareholders. The separation of ownership and control can create a situation where

corporate executives prioritize their own interests over those of shareholders. In the
case of Parmalat, this led to fraudulent accounting practices that were designed to

increase the company's stock price and enrich the executives, even at the expense of

the company's long-term viability. The Parmalat scandal highlighted the need for better

corporate governance practices that ensure greater transparency and accountability.

The management of Parmalat failed to put in place an adequate monitoring mechanism.

The higher-ups give up and try to hide losses by engaging in risky activity or fraud

rather than attempting to address the organization's dilemma. They engage in certain

acts of abusing their powers and greed to save the company from revealing debts and

losses to its stakeholders. Parmalat not only carried out a strategy that involved

recording fraudulent bond repurchases, misclassifying debts, or just failing to register

obligations, but it also executed a scheme that fraudulently overstated its assets while

understating its liabilities. The entire monitoring system was completely corrupt, and

Parmalat's auditors and legal counsel assisted the company's management in

continuing the fraudulent activities (Ferrarini and Giudici).

Failure to Implement an Effective Monitoring System

In line with the company’s corporate failure, the management of Parmalat also

failed to put in place an adequate monitoring system. Parmalat's failure to implement

proper and effective monitoring procedures inside the company's governance

framework exposed abuse of authority, greed, and fraudulent behavior. Ferrarini and

Giudici (2005) were aggressive in their criticism of Parmalat's monitoring structures and

blamed the auditors, claiming that Parmalat's successive auditors, Grant Thornton

International and Deloitte Touche Tohmatsu, failed to detect fraudulent activity at the
company and that Grant Thornton's Italian partners were possibly involved in the fraud.

They further claim that some high-level foreign banks neglected to do due diligence and

advise stakeholders and the market about Parmalat's financial difficulties.The auditors

failed to see the clear governance lapses in Parmalat Group. Not only did Parmalat

execute a scheme that involved activities such as recording non-existent bond

repurchases, mischaracterizing debts, or simply failing to record debts, but the entire

monitoring system was rotten to the core, and Parmalat's auditors and legal advisors

literally assisted Parmalat's management in sustaining this fraud.

The collapse of Parmalat identified aspects typical of failing companies, such as

fraudulent financial accounting and reporting systems, poor performance, political

influence, greed, a dominant shareholder, complex structures, and puzzling operating

processes. These were mostly a result of Parmalat's governance structures being

inefficient and severely undermined by the CEO and his management's lack of

accountability, as well as governance procedures that were poorly created or put into

practice. The additional major flaws in the corporate governance process that

contributed to Parmalat's catastrophe are briefly detailed in the sections below.

Non-Compliance with Italy's Corporate Governance Code

When a group of shareholders controls a company, it is critical that part of the

directors be independent of the controlling shareholders, according to the law in Italy.

Unfortunately, Parmalat did not follow this essential element of corporate governance

legislation, and no reason was provided for its failure to do so. Parmalat should have

known that an efficient compliance process ensures that a corporation complies with the
appropriate laws and regulations in order to promote good governance and

accountability and preserve good citizenship status in the environment in which it works.

Based on the assessment and thorough study of the case of Parmalat, it is

important to assume that the weak corporate governance system, supported by the

government's inability to enforce legislation, was a major factor in the company's

collapse. Hence, a weak corporate governance framework is strongly linked to

corporate failure and has an impact on organizational performance.

Poor Organizational Structure

The Positions and Functions of Chair and CEO were not separated

At Parmalat, the positions of Board Chair and CEO were held by one person,

Tanzi. The proponents of CEO and Chair independence base their view on the need to

maintain a strong governance structure that ensures effective checks and balances that

the board, and particularly the board's Chair, is supposed to impose on management led

by the CEO. The board of directors and the chair of the board are primarily responsible

for hiring, firing, evaluating, and compensating management (including the CEO) based

on performance. As proven by the case of Parmalat, these proponents claim that it is

difficult to efficiently execute the functions of both Chair and CEO under one person. A

single CEO and Chair cannot fulfill these duties outside of his personal interests,

making it more difficult for the board to accomplish its vital functions. As a result,

separating the responsibilities of the Chair and CEO can lead to better management
and oversight, given that an independent Chair can guarantee that the board is fully

involved with the strategy and evaluate how well it is being implemented by

management led by the CEO. Importantly, appointing an independent Chair will

demonstrate to all stakeholders that the CEO is accountable to a unified board led by a

visible leader.

Lack of Independence of Non-executive Directors

It was evident that the non-executive directors lacked independence. At least one

Parmalat board member had been employed by the company since 1963 as a Senior

Manager. This demonstrates how susceptible this participant is to being persuaded to

make biased conclusions. In the initial financial report of Parmalat from 2001, four of its

thirteen directors were independent but did not give the names of these individuals.

According to its 2003 report, Parmalat's executive directors consisted of Calisto Tanzi

(Chair and CEO); Tanzi's son Stefano; Tanzi's brother Giovanni; nephew Paola Visconti;

Parmalat's CFO Fausto Tonna; and senior managers Luciano Del Soldato, Alberto

Ferraris, and Franseco Giuffredi. Members of executive management were also

included on Board Committees. This demonstrates that the corporation's governance

system was both ineffective and unethical, making an effective and powerful

governance process a farce.

Fraud

In 1990, the company's South American division began to experience losses,

which CEO Calisto Tanzi chose to conceal in the company’s financial statements. Just

like any other frauds, the Parmalat scandal was caused by an effort to hide its losses.

Parmalat's decision to commit fraud led the business to one of the biggest corporate

scandals, encouraging an ever-more dishonest accounting practices and self-dealing.

Double billing and inflating of invoices, illegal alteration of financial statements, and

non-existing and forged financial account (Bonlat)— these are the specific unethical

business practices Parmalat has done.

Double billing and inflating of invoices

Parmalat's deceitful scheme allegedly started in 1990, when the company's

financial performance got worse, and continued until 2003. Parmalat executives used a

variety of unethical techniques to extend the fraud over a 13-year period. According to

court documents and people familiar with the company’s financing, Parmalat permitted

for about $5 billion in bank loans by double billing for certain merchandise. Further

records validated by prosecutors investigating inside Parmalat have concluded that the

company double-billed at least 33 traders and numerous supermarkets in Italy for their

products and used the invoices to obtain credit from 44 Italian banks. New York Times

(2004) has released a report that the company used the receivables as a collateral to

borrow money from the banks. Also, some of the third-party auditors and bankers have

been found to be cooperating with Parmalat to engage in financial engineering to hide

their debts and disguise it as an equity. “As much as 300 workers were informed of the

company’s double-billing scheme,” according to Parmalat employee Claudio Pessina.

Ron Rimkus (2016) argued that the double billing scheme was started when the

Parmalat accountants selectively duplicate invoice, commonly the name of the shipping

company that delivers the milk, from the accounts sold on credit to a supermarket or

retailer. By making such duplicate invoices, the company could increase their revenues

and accounts receivable and use them as a form of collateral in exchange of the

borrowed money from the banks. This scheme could increase their liabilities and their

cash.

Citigroup were also identified as one of the perpetrators of this scheme.

According to the testimony of Marco Ghiringhelli of PriceWaterhouseCoopers, Parmalat

has obtained a financing of $348.9 million from Citigroup by utilizing the fake billings of

many supermarkets. With the help of the billings, the Parmalat are enabled to seek

financing from the bank by creating an artificial receivable, otherwise the company

would have difficulty to borrow money. When the fraud was revealed in 2003, Claudio

Pessina, an internal accountant of Parmalat, notified the investigators that the Citibank

employees knew the double billing of the Parmalat as early as 1995. Citigroup denied

the accusations and they pleaded to the Milan police that they are also victims of the

Parmalat scandal.

Illegal alteration of financial statements

 After completing its review of the company’s books, PWC determined that

Parmalat’s financial statements had been misstated since at least 1990. Parmalat

reported positive and growing earnings every year from 1990 through 2002. After

properly restating its financials, however, PWC revealed that Parmalat had actually lost

money in 12 of those 13 years. PWC concluded that Parmalat’s fraud began in 1990 as

an attempt to cover losses at a South American subsidiary.

In this case, executives Tanzi and Tonna deployed a wide range of deceitful

tactics to bring in extra cash and to disguise these actions from the outside world. Such

a tactic, however, only escalates the original problems over time. In the case of a

chronically unprofitable company such as Parmalat, the problems introduced by taking

on too much debt must ultimately meet their day of reckoning. Then, the accounting

ruse eventually reflects the company’s underlying economics. This scenario illustrates

why Parmalat’s case first manifested itself as a debt crisis and was only later revealed

as a fraud.

Hid losses and overstated assets and revenues

This tactic is used even before the scandal is publicized. Started in 1995,

Parmalat created various accounts where uncollectible and impaired receivables

transferred, the losses are now hid, at the same time the assets-which considered to be

non-existent- value is overstated . By overstating the value of these assets, the

company avoided reflecting the negative effect on its income statement that would have
resulted from appropriately setting aside or writing off the bad debt. The Parmalat group

has been fabricating tactics on different subsidiaries to offset their losses and keep on

concealing an account to another. The offsetting of losses resulted in fictitious assets

and business activities in their financial records to support the improper accounting

practices. By September 2003, one of the biggest entities owned by Parmalat was

Bonlat Financing Corporation, based in Cayman Islands, a subsidiary where the

majority of assets, approximately about €8.6 billion ($9.97 billion), were transferred.

Understated Debts

According to the summary of allegations in the Plaintiff Securities and Exchange

Commission on the United States District Court for the Southern District of New York,

Section 13, as of September 30, 2003, the Parmalat group inflated its debt up to at least

€14.3 billion ($16.6 billion) and only €6.4 billion ($7.42 billion) was recorded in their

book. The company spent time learning different techniques to hide its debt and

maintain outstanding financial soundness to the eyes of consumers, banks, and

investors.

These techniques include the false recording of a €3.3 billion ($3.83 billion) debt

repurchase by subsidiary Bonlat, the creation of fictitious loan participation agreements

to convert €1.0 billion ($1.16 billion) of debt into equity, misleading labeling of certain

receivable sales as non-recourse while retaining payment obligations of approximately

€500 million ($580 million), improper elimination of around €300 million ($348 million) of
debt during the sale of a Brazilian subsidiary, mischaracterization of €300 million ($348

million) of bank debt as intercompany debt, false elimination of €200 million ($232

million) in payables by recording them as paid when they were still outstanding, and the

failure to record a €400 million ($464 million) liability associated with a put option.

Non-existing and forged financial account

During the 13-year fraud period, the executives of the company used multiple

unethical business practices in an attempt to cover its losses. Moreover, they used

receivables from these fake sales as collateral to borrow more money from banks, and

even created fake assets thereby inflating reported assets.

By the end of 2002, Parmalat’s subsidiary in Cayman Islands, which played a

central role in the company’s bankruptcy, was reported to allegedly have a €3.95 billion

in cash and marketable securities at Bank of America in New York City in the account

name of Bonlat Financing Corporation ("Bonlat"). When Bank of America disputed the

veracity of the paperwork pertaining to Bonlat's accounts, the Parmalat controversy

eventually escalated into a full-fledged crisis. As a result of multiple investigations and

validations, it turned out that the assets and bank account were fakes. Additionally, the

alleged confirmation on the Bonlat’s accounts was a forgery, and reported that a

scanning machine had been used to forge the Bank of America documents, which were

then sent to auditors who certified Bonlat's accounts. The Bank of America immediately
reported to the Securities and Exchange Commission that genuine documents

authenticating the €3.9 billion account did not exist.

In a much more detailed summary of allegations by Plaintiff Securities and

Exchange Commission v. Parmalat Finanziaria S.p.A. on the United States District

Court for the Southern District of New York (2003), Section 12 reveals that “in

simultaneous with the creation of Bonlat Financing Corporation in 1998, Parmalat S.p.A.

transferred approximately €1.5 billion ($1.75 billion) in nonexistent assets from two other

pre-existing nominees. Chief Financial Officer Fausto Tonna has admitted that Bonlat’s

assets were entirely invented and that its books and records, as well as account

statements for a nonexistent bank account, were fabricated as well. By the end of 2001,

the amount of valueless assets recorded by Bonlat had grown to approximately $2.0

billion. By the end of 2002, this number had grown to approximately $7.0 billion. Thus,

during 2002 alone, approximately $5.0 billion in operating losses and worthless assets

were hidden in this fraudulent structure alone and Parmalat S.p.A.’s pretax net earnings

were overstated by a like amount. By September 2003, Bonlat’s unsubstantiated assets

had risen even higher and totaled €8.6 billion ($9.97 billion).”

The Aftermath

In the course of the full-blown scandal, on December 9, 2003, S&P reduced

Parmalat's bond rating to junk and the stock price dropped another 40% in the following

days (see Figure 1). Enrico Bondi, a turnaround specialist, was appointed by the

Parmalat board on the same day that Tanzi resigned as CEO to deal with the situation.
On December 16th, Bondi hired PWC to examine Parmalat's accounts. The company's

Bonlat account did not exist, according to a notice sent by Bank of America's New York

office to the company's current auditor Grant Thornton on the same day. The Parmalat

stock price dropped to almost nothing on December 19 after the company revealed

publicly that €3.95 billion in cash was missing (see Figure 1). Executives at Parmalat

then went on a rampage, erasing computers and trashing paperwork associated with

these off-balance-sheet operations. Finally, on December 27 of the same year, Parmalat

was formally declared insolvent and CEO Calisto Tanzi was detained after being

charged with fraud.

Figure 1. Parmalat Stock Price, January 2002 to May 2004

Sources: Bloomberg, CFA Institute

Timeline of the Aftermath of the Parmalat Scandal

Following the case of the Parmalat Scandal, below are the significant events

occurred on the downfall of one of Italy’s food giants and largest empire at the time, as

presented by (Rimkus, 2016):

● December 2003: Parmalat shares delisted from stock exchange in Milan.

● 22 December 2003: The Italian government pushes for a quick bankruptcy

settlement to protect industrial operations.

● 27 December 2003: Parmalat is officially declared insolvent, and former CEO

Calisto Tanzi is indicted for fraud and arrested.

● 2004: Bank of America’s chief of corporate finances in Italy, Luca Sala, admits to

participating in a kickback scheme in which he personally received more than

$27 million from Parmalat delivered to a Swiss bank account.

● 2005: Parmalat is re-listed on the Milan exchange (Wall Street Journal, 3

October, 2005).

● 2008: Former CFO Fausto Tonna is sentenced to two and a half years in prison

for his role in orchestrating the complex web of offshore subsidiaries to disguise

the fraud.

● July 2009: Bank of America agrees to pay $100 million to settle charges that it

helped Parmalat executives perpetuate the fraud.

 ● 2010: Former CEO Calisto Tanzi is sentenced to 18 years in prison (at the age of

72).

● April 2011: Morgan Stanley, Bank of America, Deutsche Bank, and Citigroup are

acquitted of market-rigging charges.

Conclusion

Many organizations are skeptical about the action to take all along a period of a

catastrophe. Because all situations could be both a threat and an opportunity,

organizations feel uncertain about the game plan or resolutions that will best guide them

to the crunch period and – expectantly – will help them to carry on top of their games.

The following conclusions and courses of action have been reached in this major

problem following a thorough review of the relevant findings and discussions.

1. One of the much publicized industrial empires of Italy, the food giant and a

multinational corporation, Parmalat had uncovered a massive debt hole,

referred to as a "Buconero" or a Black Hole, amounting to nearly €4 billion,

one of the well known corporate scandals to have happened over the last

30 years.
Alternative Courses of Action:

● Problems emerge when debt is already extreme and budgets from new

borrowing are not used carefully (while at the same time corruption exists),

borrowers must cautiously set their fiscal spending and deficit plans to maintain

their debt in a tenable way. Organizations must also closely examine potential

returns on their projects and their ability to repay through higher tax revenues

before taking on new debt.

● Businesses should consider raising capital without taking on a new debt. There

are options like Peer-to-peer lending or equity crowdfunding that are worth

considering to either raise debt over a predetermined period at a set interest rate

(peer-to-peer lending) or trade a stake in the business (equity crowdfunding)

● Businesses should try a number of tools at their disposal to restructure their

debts. They should either liquidate their assets to pay off debts or use a debt

restructuring tool for companies like the debt-for-equity swap.

2. Corporate governance at Parmalat had a significant role in the overall

fraudulent activity that contributed to their bankruptcy. For the purpose of

preventing the corporation from disclosing debts and losses to its

stakeholders, they do certain actions of power, abuse and greed.

Alternative Courses of Action:

 ● If the monitoring system had been taken care of by the internal control adopting

rigorous inspections in the management to be effective in spotting overdue and

false reports, further steps of indicating fraud would have been avoided.

● Ownership and control must be clearly separated among the executives of

Parmalat and the fiduciary roles in the company by having a corporate counsel.

In this way, unethical behavior that derives from personal interests and benefits

could be prohibited.

● Establish an effective code of conduct and code of ethics for the company. This

will guarantee that workers at all levels of employment closely abide by the

company's principles and culture.

3. Fraud

A. Parmalat enabled approximately $5 billion in bank loans by double

invoicing for certain items which included at least 33 traders and numerous

supermarkets in Italy for their products and used the invoices to obtain

credit from 44 Italian banks.

Alternative Courses of Action:

● Investors and banks should always have access to the information of the

company like current financial position, change in management system, and

business decisions.
 ● Promote and implement the five-year rotation of the auditors of the companies

and make it mandatory.

● Increase enforcement mobility within the entities to make sure that they are

compliant with the regulations such as taxes, employment and labor law, and

filing of consolidated financial statements.

B. PWC determined that Parmalat’s financial statements had been misstated

since at least 1990. The company hid its losses by overstating assets and

revenues, and understating debts.

Alternative Courses of Action:

● Since board members are the primary responsible for all the financial records

and system of the company, they must issue a semi-annual or annual corporate

governance statement. By this way, the companies maintain their transparency

and establish trust to the consumers and investors once the authorities verify

their reports.

● The Parmalat fraud case was manipulated by the top members of the board, one

of them was the owner of the company. The SEC should implement stricter

requirements from the listed companies as well as examine their financial reports

according to the standard. Any malicious and questionable transactions should

be discussed immediately.

● The government should require companies to use upgraded Enterprise Resource

Planning (ERP) systems where their financial reports and inputs are done. By
 this way, authorities are able to monitor real time reports and fabricating the

information of the reports would be impossible.

C. By the end of 2002, the authenticity of Bonlat Financing Corporation

("Bonlat"), Parmalat’s subsidiary in Cayman Islands which holds €3.95

billion in cash and marketable securities, was reported fake and forged, as

denied by the Bank of America.

Alternative Courses of Action:

● Banks should implement stricter verification processes and policies in all account

holders, especially large companies like Parmalat (Bonlat), as a way of

preventing forgery and fake accounts.

● There should be a strong emphasis on regulation and legislation for all

corporations. This will ensure that corporations are in compliance within the legal

requirements of the country. Regulations such as tax codes, employment and

labor laws, antitrust regulations, and advertising regulations are essential for

businesses to operate ethically and responsibly.

● Empower local and central control through adopting a centralized cash and

treasury management solution to retain control over local operations, maintain

local bank relationships, and review the corporation’s procedures.

 D. As a result of the concentration of power, Calisto Tanzi, the CEO and head

of the Parmalat board, was unable to perform the obligations of both posts.

Adding to the challenge of performing the responsibilities outside of

personal interests is the presence of a board of directors that is primarily

made up of relatives.

Alternative Courses of Action:

● In having effective and unbiased decision-making, companies should appoint

such positions based on competency and experiences. Parmalat must shift to a

new set of corporate management to oversee the organization's objectives and

ensure proper corporate governance.

● Call out for a meeting. The presence of the decision-makers should be more

evident and stand-out especially in times of having existing problems in order to

reduce the effect and correct the errors.

● Being the highest position in the company, it should have been an authority to act

and take control of the situation before it gets worse, which includes the authority

to let the stakeholders know what the company is facing and take part in the

solution.
Recommendations

Following extensive discussions and the compilation of data and information from

various sources, this case study produced the following recommendations:

1. Alternative Course of Action #3 - Businesses should try a number of tools

at their disposal to restructure their debts. They should either liquidate

their assets to pay off debts or use a debt restructuring tool for companies

like the debt-for-equity swap.

In order to decrease the immense debt load, Parmalat should consider debt

restructuring alternatives. Restructuring a debt is amending the terms of an existing loan

with the creditor to make it more manageable. This can entail extending the repayment

periods, lowering the interest rate, or even reducing the total amount owed. Parmalat

can make its financial responsibilities more manageable and affordable by restructuring

its loans.

A debt-for-equity swap is another option that Parmalat can undertake. A portion

of the company's debt is converted into equity ownership in this process. Parmalat can

decrease the overall debt load while providing creditors the opportunity to participate in

the company's future success by providing them shares of the company in exchange for

their outstanding debt. This strategy can facilitate Parmalat's financial recovery and aid

to strengthen its capital structure.

An additional approach Parmalat could employ is any non-essential or

underperforming assets in order to obtain funds to pay off obligations. Parmalat may

attain the required liquidity to reduce its debt load by selling off assets like properties or
non-core business assets. Thorough examination should be done to find assets that can

be sold off without affecting the company's essential functions or long-term growth

prospects.

2. Alternative Course of Action #2 - Ownership and control must be clearly

separated among the executives of Parmalat and the fiduciary roles in the

company by having a corporate counsel. In this way, unethical behavior

that derives from personal interests and benefits could be prohibited.

Until the beginning of the 20th century, companies were run down by families.

However, as the evolution of public ownership transcends thus large corporations

entering the global market and global trading exchange change in its trend.

CEO, CFO’s and Chairman are holistically differentiated in its function and

position in the company. The corporate structure was then parted in two ways which is

the Board of Directors and the Upper Management. In the case of Parmalat, we can see

how every position sided on personal interest of the family owners of the company.

In order to differentiate who holds the power and how the power will be managed

in this kind of setting, corporate governance must be highlighted and prioritized.

According to the Asia Development Bank, some family-owned corporations such as CP

Group in Thailand, the Ayala Group in the Philippines, or Samsung and Lucky-Goldstar

in Korea hire their professional managers to assist the family owners with limited

entrepreneurial abilities. With the corporate counsel or the professional managers

assisting the family owners, there will be more effective senior management assistance

and decision making adviser for the company. In this way, unethical behavior or

personal interests can be limited and questioned already from the beginning.

Alternative Course of Action #3 - Establish an effective code of conduct for

the company. This will guarantee that workers at all levels of employment

closely abide by the company's principles and culture.

In the case of Parmalat, the CEO and the owner of the company are the same

person, it is highly suggested to create an effective corporate code of conduct. This will

ensure that employees at every job level will strictly act in accordance with company

values and culture. The Human Resource Department has the biggest role in order to

create disciplinary actions against employees who will breach the code. A

comprehensive company code integrated into the company culture will soon affect the

character of the employees of the company.

An effective corporate code of conduct will highlight favorable behavior and

practices of the employees that aligns with the company’s mission and vision and short

term and long-term objectives. It is a comprehensive list of workplace policies and

procedures addressed and communicated to the employees regularly. It also includes

the consequences of any action committed that are against and will be proven a

violation of the company’s code of conduct.

Code of conduct highlights behaviors and actions of the employees that covers

the dress code, work attitude, and policies about confidentiality and personal interests.
On the other hand, code of ethics refers to the principle and values that employees

exhibit in their decision-making. The observance of honesty, integrity, transparency,

respect and responsibility must be applied in the organization.

A great example of a business code of conduct is from Starbucks. They generally

encourage the employees to “Speak Up” with their issues and concerns. The Speak Up

culture in the work environment helped the employees understand business to personal

affairs and provide solutions with the help of support and resources from the company.

Lastly, the written corporate code of conduct and code of ethics must be relayed

on all ranks of the employees. It is important that they know, understand and evaluate

the codes by themselves so that the application in the work environment is feasible to

do so. Companies include the discussion of company codes in their organization

training. This will further solidify the learnings and application of the codes among the

employees.

3. A. Alternative Course of Action #1 - Investors and banks should always

have access to the information of the company like current financial

position, change in management system, and business decisions.

In a commentary article, Ron Rimkus (2016) stated the importance of company

investigation. The expert investor’s basic intelligence constitutes all he or she needs to

recognize that something is wrong. The analysts claimed that holding substantial cash

balances that provided little in interest as well as holding significant amounts of debt

which demanded higher interest payments was considered “inefficient balance sheet

management,” and they had no idea how correct they were. It came to light that, among
other things, the company’s disclosed cash balances have been intentionally

exaggerated and its financial obligations were significantly underrated.

J. Marvirick (2022) stated that financial statements serve as a quick overview of a

company’s financial condition at a specific point in time, providing information about its

performance, operations, cash flow, and overall situation. Shareholders require financial

statements in order to draw sound choices about their equity investments, particularly

when voting on corporate issues.

Because of the Parmalat’s revelation of their financial management, the

European Commission in March 2004 released a proposal for a mandatory audit, an

order that would improve credibility in accounting records. If this proposal becomes law,

auditing firms would feel that numerous regulations are tightening their operations. The

commission also raised the concern regarding the corporate governance proposal that

would greatly affect their company to become more transparent and visible.

Aggarwal (2008) also agreed that to persuade an investor to invest, the company

must have a good corporate governance policy and make them more appealing.

Presenting a financial statement to the holders of the company must be done with due

diligence and utmost accuracy with the relation to their business activities. The

investor’s demand for transparency doesn’t stop from the moment they already invested

in the company; instead, they will need more disclosure.

The double billing scheme could have been avoided by the banks and the

security holders of the Parmalat when they could command the company to disclose an

ample of financial statements and corporate governance proposals. In this way, the
company would have much pressure to stick with the legal ways to seek financial help.

In order to do so, the local legislation is also urged to make such policies that would

have made the companies stay on the side of transparency and accountability.

B. Alternative Course of Action #3 - The government should require

companies to use upgraded Enterprise Resource Planning (ERP) systems

where their financial reports and inputs are done. By this way, authorities

are able to monitor real time reports and fabricating the information of the

reports would be impossible.

The government should require companies like Parmalat to use upgraded

Enterprise Resource Planning (ERP) systems where their financial reports and inputs

are done. Companies acquire new transactions everyday and their reports are required

to be updated and organized. ERP systems provide these functions to easen up the

filing and recording of all transactions made. Other than minimizing errors and time

saving, the systems require companies to comply with legal requirements and

accounting rules to guarantee that all transactions and information are accurate.

Upgraded ERP systems used high level software to protect the companies from

unauthorized access to company reports that are highly confidential. Moreover,

performing fraud and corruption by internal members of the company would be

impossible and assure that investors are safe and secured away from it.

C. Alternative Course of Action #3 - Empower local and central control

through adopting a centralized cash and treasury management solution to

 retain control over local operations, maintain local bank relationships, and

review the corporation’s procedures.

Without visibility and control, any corporation is going to struggle to protect itself

from fraud and any other unethical business practice. In the case of Parmalat where the

main problem is embarked upon from the top down, prevention can be a difficult task

(Malmgren, 2004). In order to prevent the same case from happening again, Parmalat

should adopt a centralized cash and treasury management solution.

Centralized treasury is a financial management structure in which a company's

treasury functions are centralized into a single department or team (HighRadius, 2023).

As businesses grow, just like Parmalat, the treasury department becomes more

complex. With this, a centralization strategy should be considered as this can bring a

number of key benefits for the company. As stated by HSBC (2022), treasury

centralisation is not an all-or-nothing process, but rather can be implemented

progressively over time, in line with the corporate’s organization and goals. Moreover, a

hub bank can be established to facilitate standardized flows for all subsidiaries in a

payments factory or shared service center, or it can be as basic as centralizing cash,

interest rates, and foreign exchange.

Parmalat should centralize its cash and treasury management in order to

streamline cash management procedures, increase their cash visibility, and reduce

financial risks. Moreover, this will give them better control and oversight over their cash

resources by centralizing cash management operations, which can enhance short- and

long-term financial performance. In line with the case of Parmalat on Bonlat Financing
Corporation, a non-existing and forged account, undertaking a global system rollout

would allow Parmalat to review its procedures. Oftentimes, the central treasury is

unclear as to how many bank accounts are held across the operation– who is able to

authorize payments made. Having a treasury management system implementation will

force organizations like Parmalat to revisit their operations, number of external bank

accounts, and have real-time visibility and control of the businesses' true cash flows and

authorized payments.

D. Alternative Course of Action #1: In having effective and unbiased

decision-making, companies should appoint such positions based on

competency and experiences. Parmalat must shift to a new set of corporate

management to oversee the organization's objectives and ensure proper

corporate governance.

Using a qualitative meta-analysis research design, researchers from Germany

found the recurring patterns that explain how and why large corporations fail. Parmalat

is categorized under the Imperialist archetype. This archetype refers to corporate failure

due to overexpansion. The process resulted in conflicts with internal and external

stakeholders.

In order to adhere the issues beforehand, Parmalat must create a capable board

of directors to manage the organization's goals and guarantee compliance with legal

requirements. First, the creation of a strong base of shareholders where the

characteristics follow the same with shareholder public entity structure. The Board of

Directors must be elected. They are from the pool of qualified candidates that can vote

in Regular Shareholder’s meetings. Minortiy shareholders are also represented in this

matter. In an international scale, the managing director and the Chairman function’s are

separated. Thus work functions and control in business operations were clearly lined

through.

The Board of Directors must include a Litigation Comittee that will oversee

insolvency issues of the affiliated companies of Parmalat. In this way, a committee is

assigned to raise issues and concerns whenever there is among the top level

management of the company.

The ownership structure is completely different from what is the norm in Italy

however, the application of a better corporate governance for Parmalat will bring back

the trust and confidence of the public to the leading dairy business. Good governance

doesn’t necessarily mean that the company runs perfectly without problems but a good

governance means there is a balance between performance and compliance. It is a

valuable lesson that the company will practice a new corporate governance and create

a strong and better relationship with their stakeholders in the long run.
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