This document is a term paper by a group of students analyzing the fraud at Parmalat, an Italian food company that went bankrupt in 2003. The paper has four chapters: 1) it provides background on Parmalat and its fraudulent activities including hiding losses and overstating assets; 2) it discusses how Parmalat understated its liabilities by billions of euros through accounting manipulations; 3) it examines how Parmalat concealed its actions with complicit auditors and banks and rationalized the fraud; 4) it proposes improvements to auditing and corporate governance to prevent future frauds.

1. UC, Berkeley
Walter A. Haas School of Business
UGBA 127 – Fraud and Forensics
Sumer 2012
GROUP TERM PROJECT
The case of Parmalat
Antonia Ficova
Paneuropean University, Slovakia
antonia.ficova@yahoo.com
Allen Tung
UC Berkeley
allentung.adhoc@gmail.com
Norman Yau
UC Berkeley
nyau1991@gmail.com
Vijay Shakti Aggarwal
UC Berkeley
fxvijay1691@yahoo.co.in
Abstract
The focus of this paper is on fraud of the firm Parmalat. This paper provides a focus on
securities fraud that includes technique such as manipulation of Parmalat’s balance sheet and
income statement through fictitious investment assets, sham transactions. Outline is organized
as follows. Chapter 1 presents briefly backround of the firm. Chapter 2 discusses liability
understatement. Concealment and rationalization is presented in Chapter 3. Finally, chapter 4
includes improvements and of the study.
Key Words: Parmalat, fraud, red flags.

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Table of Content
Table of Content.........................................................................................................................2
1 BACKROUND ON PARMALAT .........................................................................................2
2 LIABILITY UNDERSTATEMENT.....................................................................................3
3 CONCEALMENT AND RATIONALIZATION.................................................................4
4 IMPROVEMENTS AND CHANGES..................................................................................5
REFERENCES...........................................................................................................................6
1 BACKROUND ON PARMALAT
Parmalat is an Italian food company formed in 1961 by Calisto Tanzi. Its focus was on
dairy, but eventually the company branched out into other foods. The company’s geographic
reach also extended, as it made strong market penetration all over Europe and Latin America.1
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Unfortunately, Parmalat’s clean and professional image was only a façade. In December 2003,
the company went bankrupt when it ran out of cash despite what was indicated on previously
issued balance sheets2
. With an unexpected bankruptcy, Parmalat was extensively investigated
which revealed that the company had “hid losses, overstated assets, recorded non-existent
assets, understated its debt, and diverted company cash to Tanzi family members.”3
Amazingly,
the fraudulent behavior had gone on for more than a decade. Many investigators agree that if
Parmalat had not cooked its books, it would have “posted losses every year from 1990 to the
end [bankruptcy].”4
2 LIABILITY UNDERSTATEMENT
Before Parmalat’s bankruptcy, some analysts were already criticizing the company’s
high debt levels. This issue was mostly forgiven as it appeared that the company had sufficient
cash to cover its liabilities. When the scheme came crashing down late 2003, it was revealed
that Parmalat had insufficient cash to cover its liabilities and that its liabilities were
understated. Soon after the bankruptcy, it was revealed by Parmalat through new financial
statements that the company had almost 8 times more debt than previously reported – more
than 14 billion euros .1
The reason behind this huge buildup of obligations and liabilities was to
conceal the lack of real earnings and to fill the company’s needs. According to UC Berkeley
Professor Mary-Jo Kranacher, the most common method of concealing liabilities is to “simply
fail to record them.”5
This is precisely what Parmalat did using various complex accounting
manipulations. A couple of their strategies included transferring the debt that was on their
books to off book subsidiaries and making some liabilities look like an equity infusion.4
The fraudsters in Parmalat took great pains to conceal their actions. In order to continue
operating and maintaining the appearance of turning a profit, liabilities had to be undertaken to
provide capital. Worsening the financial situation of Parmalat was the Tanzi family’s
transferring of millions of euros to their other businesses.6
Debt was the only way for the
company to actually have significant cash flows. To offset the liabilities that could not be
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moved off the books, the company falsified assets to maintain an acceptable looking balance
sheet. 7
Unfortunately, debt that kept the company afloat and going in the short run would
actually be the catalyst to uncovering all the dirty deeds. The default of a $185 million bond
payment in November 2003 caused auditors and banks to take a closer look at Parmalat’s
books which would lead to the uncovering of massive discrepancies.7
3 CONCEALMENT AND RATIONALIZATION
Much of the world was shocked when the reputable food giant Parmalat fell. With two
of the world’s largest accounting firms, Deloitte & Touche and Grand Thornton, auditing the
books along with several of the world’s largest financial institutions helping with Parmalat’s
financing, it is difficult to see how major illegal acts within the company went concealed for so
long. The reason that Grant Thornton did not discover and report fraudulent activity occurring
within Parmalat was for a couple of reasons. First, the auditor failed to abide by its fiduciary
duties and to follow proper procedures. Secondly and more importantly, was the presence of
collusion between the audit firm and Parmalat. Lorenzo Penca, President of Grant Thornton in
Italy, and Maurizio Bianchi, a senior auditor helped Parmalat’s managers conceal losses and
debt until the end of 2003.3
Deloitte was brought in to audit certain parts of the company in
1999 in accordance with Italian law that required rotation of auditors but they were hindered by
Grant Thornton’s withholding of information.8
In short, the external auditors were essentially
useless in preventing fraud in the case of Parmalat.
Audit firms were not the only ones that failed to notice illegal activity. Several large
banks such as Bank of America, Deutsche Bank, and Morgan Stanley received sizable fees
from their partnership with Parlamat. These banks underwrote Parmalat’s bonds that kept the
firm afloat when it was losing millions.9
Citigroup created an entity in Delaware named
Buconero that was suspected of being used by Parmalat to “conceal borrowings and to conduct
a massive fraud.”10
The banks also set up complex financial instruments that made Parmalat’s
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financial position look healthy. Rather than taking a closer look at what Parmalat was doing
with complex transactions and offshore entities, banks were appeased by the fees and
commissions they were generating and left things as they were, demonstrating that “banks will
always succumb to the temptation of fat fees today – and leave the awkward questions for
later,”10
It wasn’t just the unconcern or lapses by outside parties that helped to conceal the fraud
occurring within Parmalat. The Tanzi family, which took millions of euros out of Parmalat and
put it into other family businesses were essential in undermining the internal controls of the
company that were supposed to protect investors. They were able to do this as they owned 51%
of Parmalat’s shares through their family company Coloniale SpA.11
The founder’s son,
Stefano Tanzi, even sat on Parmalat’s board. Corporate governance was also weakened
because the internal control committee was headed by the family’s accountant and also
included CFO, Fausto Tonna, who was also the chairman of Coloniale SpA.13
The notion of
having internal and independent oversight within the company was next to non-existent and the
Tanzis were free to misappropriate as much cash from Parmalat as they pleased – initiating
more bonds and borrowing whenever the funds ran low. Their rationalization likely stemmed
from the fact that many of their family businesses, such tourism and football, were doing very
poorly and they needed the cash to continue sustaining them.3
4 IMPROVEMENTS AND CHANGES
External auditing for Parmalat could have vastly improved if strict procedures were
followed and red flags were raised at any point that there was indication of illegal activity. The
auditors should have been aware of business trends that were different from the rest of the
market sector, the presence of non-transparent financial vehicles, frequent debt offerings
despite apparent cash surpluses and a complex group structure which did not reflect the
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operational needs of the business. A well-functioning internal control mechanism within a
company relies upon the independence and competence of the employees who oversee the
internal controls. Members of the audit committee and internal control committee should not
be a related party to the company and should not have a vested interest in the company’s
financial position. Parmalat’s internal control would have been more effective with
independent members who were not part of the company’s management. As for the board of
directors, it should consist of independent individuals who understand the industry and firm.
This would insure that the board represents the interest of all shareholders and that illegal and
fraudulent activity would be handled without bias.
REFERENCES
1
http://www.msnbc.msn.com/id/4030254/ns/world_news/t/parmas-god-falls-
sky/#.UBk5CZbhdbo
2
http://www.msnbc.msn.com/id/3791071/ns/business-world_business/t/parmalat-files-
bankruptcy-protection/#.UBmQ1pbhdbo
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3
Ferrarini, Guido, and Paolo Giudici. “Financial Scandals and the Role of Private
Enforcement: The Parmalat Case.” After Enron Improving Corporate Law and
Modernising Securities Regulation in Europe and the US. Ed. John Armour and Joseph
McCahery. Oxford: Hart Publishing, 2006. 159-214. Print
4
http://www.time.com/time/magazine/article/0,9171,785318-2,00.html
5
Kranacher, Mary-Jo, Richard Riley, and Joseph T. Wells. Forensic Accounting and Fraud
Examination. Hoboken, NJ: John Wiley, 2011. Print.
6
http://www.sec.gov/litigation/litreleases/lr18803.htm
7
http://www.businessweek.com/stories/2004-01-11/how-parmalat-went-sour
8
http://www.ft.com/intl/cms/s/0/d52cf9a0-5d2b-11d9-bb9c
00000e2511c8.html#axzz22LZse3RK
9
http://online.wsj.com/article/SB107326014652941500.html
10
http://www.economist.com/node/2374354
11
http://online.wsj.com/article/SB107239557199722800.html
12
http://www.usatoday.com/money/world/2004-02-17-parmalat_x.htm
13
Melis, Giovanni, and Andrea Melis. “Financial Reporting, Corporate Governance and
Parmalat: Was it a Financial Reporting Failure?.” Governing the Corporation. Ed.
Justin O’Brien. West Sussex: John Wiley & Sons, Ltd, 2005. 233-254. Print
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