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Europe's Enron: Case Study on the fall of Parmalat

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Case Study followed by my personal recommendation on how to improve the landscape after the Parmalat disaster. …

Case Study followed by my personal recommendation on how to improve the landscape after the Parmalat disaster.

This was part of a course work I had to do.

Published in: Business

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  • 1. December 2012Case Study CHAPTER 18: PARMALATMKT 3400: Principles of International Business Yafees Sarwar
  • 2. MKT 3400 CASE STUDY YAFEES SARWARA Statement of the Problems:Should the European and Italian authorities do more to make sure that companies holdthemselves to higher standards or should they be satisfied with the measures taken by Parmalatand maintain the status quo?Definition of Key Players:1. Parmalat: Parmalat is a key figure for this analysis because all the changes in laws andgovernance are now being considered because of its fraudulent activities.2. The American, European and Italian Governments: These governments are key figures forthis analysis because they have the power and means to force companies to make changes andadopt new measures. They also have the capacity to legally punish the companies.3. The financial institutions- Bank of America, CitiGroup, Credit Suisse, First Boston,Deutsche Bank, Morgan Stanley and UBS AG: These institutions are key players because theyare the ones who facilitated Parmalat to raise a lot of capital internationally and charged highfees in doing so. These institutions were the enablers of Parmalat to accrue huge amount of debtalso. It was also Bank of America who admitted to not having a certain bank account thatsurfaced initially during Grant Thornton’s auditing or investigation of Parmalat.4. Auditors- Grant Thornton, Deloitte and PricewaterhouseCoopers: The auditors were keyplayers because they were essential to finding out the fraud that was taking place at Parmalat.The first two discovered the Parmalat fraudulent accounting practices and how they wereinflating their balance sheets by hiding the losses and employing other techniques. The latter 1
  • 3. MKT 3400 CASE STUDY YAFEES SARWARwere hired ultimately to try and restore confidence in various stakeholders within Parmalat andto convince them that the company was moving ahead in the right direct post-bankruptcy.5. Upper Management-Calisto Tanzi, Giovanni Tanzi, Stefano Tanzi, Francesca Tanzi,FaustoTonna: These individuals were convicted for fraudulent practices and the consequentfailure at Parmalat. They are key players because they were in charge of Parmalat during thetime the company was being investigated and they are responsible for making all the decisionsand knowingly engaging in unethical business practices.6. Latin America, especially Argentina and Brazil:Latin America was important for theParmalat fraud case to become clear and apparent. It is in Argentina and Brazil where the firstearly red flags went off which signaled that massive theft was taking place at Parmalat.7. Enrico Bondi:He was appointed by the Italian government to oversee the recovery effortspost investigation of the firm. He was made the CEO of Parmalat and he quickly got involved toclear up the mess. Mr. Bondi brought lawsuits against the auditors and banks for recklessnessand negligence amongst many other charges.Decisions that are required to be made:There are multiple challenges facing the authorities regarding this problem and it requires multi-faceted decisions to be made. Firstly, they would need to consider the auditing standards and theregulatory systems in place. The authorities did admit that the regulations in place are not in linewith international standards and that is something they need to consider. Parmalat has schemedbillions of dollars out of the economy and resulted in tremendous amount of losses for thestakeholders. The authorities need to seriously think about reforming the accounting andreporting procedures and how tightly they need to monitor these. They would also have to come 2
  • 4. MKT 3400 CASE STUDY YAFEES SARWARup with a decision as to how to enforce these measurements. The authorities also need to focuson the way business is done in Italy. Since Parmalat’s upper management was almost entirelycomprised of the family members of one particular family, it became difficult for outsiders toknow what was really going on let alone warn others about what was going on. So the corporategovernance structure needs to be looked at and they need to evaluate how much influence canfamily members of family owned businesses listed publicly have on upper management withoutdisclosure to others. One final decision which the authorities might need to look at is the way thefirms in Italy are audited. Two or more auditors can actually audit a firm at the same time like inthe case of Parmalat during the suspected years; Deloitte and Grant Thornton weresimultaneously auditing the firm by dividing up the work. This is counterproductive because itbars the auditors from getting the whole picture of what’s going on.Alternatives ConsideredThere are not many alternatives to consider. Because of the magnitude of the corruption, most ofthe people believe that some serious measurements need to be taken to avoid future fraud cases.The case mentions that management integrity failed maybe the business schools which trainthese individuals for upper management positions should focus a bit more on law and ethics.They could get intensive training on why it is in the best interest for everyone to avoid fraudulentdealings. Ultimately everyone gets caught and all the hard work is spoiled so this is onealternative they can consider emphasizing on. Another thing they can do but it is highly unlikelyis let things be at status quo. Parmalat could be treated as a one-off and people can hope it won’tbe repeated again and that there is no need to make drastic changes to the economy andregulations based on one mishap. 3
  • 5. MKT 3400 CASE STUDY YAFEES SARWARRecommendations Strengthen auditing standards. Internationalize accounting methods and reporting standards by bringing it in line with Europe and the United States who has a proven track record to audit the firms well. Establish greater government oversight and regulations. Reform the corporate governance structure by having a greater percentage of mandatory employment for individuals who are basically ‘outsiders’ or does not have direct stake in the firm in terms of ownership etc. Reform the auditing measures and establish that only one auditor can audit a firm and the job can’t be shared or divided amongst multiple auditors. Heighten the requirements for banks to issue loans and help firms raise capital. Banks should have the complete auditor’s report before making such decisions and should have access to the auditors and can ask them for recommendations any time regarding the status and health of the firm. Make the punishment more severe for those guilty of corporate fraud by either having the option of capital punishment for money stolen over a billion dollars or the option of life in prison for anything less than a billion dollars. Harsher the punishment, the less likely people will try to steal from the company. Increase the corporate training by HR educating and explaining all the employees about theft, how to detect them and how to be a whistle blower and how it can be done safely. 4
  • 6. MKT 3400 CASE STUDY YAFEES SARWARCharacteristics of the Case that is Uniquely InternationalThere are several problems and aspects of this case which are uniquely international. Firstly,Parmalat was a global brand selling in over 80 countries worldwide. It had products all over theworld. Parmalat had acquisitions it made overseas. During the recovery process, the problemsarose that it had to sell many of its foreign subsidiaries which were not making profits.Parmalat also borrowed money and raised capital through international financial institutions likeBank of America, Citigroup, Deutsche Bank and others. Parmalat was also selling its stocks andbonds in foreign markets like in the United States.Also, during the downfall of Parmalat, the SEC in the United States sued Parmalat for engagingin fraud in the US.Parmalat was also audited by international auditors like Grant Thornton, Deloitte andPricewaterhouseCoopers.Parmalat’s upper management was also involved in opening up shadow corporations and bankaccounts in foreign countries and tax havens like the Cayman Islands and other parts of theCaribbean.All of the above are characteristics of this case which are uniquely international. 5