PARMALAT CASE
 The Parmalat group, a world leader in the dairy food business,
collapsed and entered bankruptcy protection in December
2003 after acknowledging that billions of euros were missing
from its accounts.
 Its collapse had been labelled as “European Enron” and has
led to a profound questioning of the soundness of accounting
and financial reporting standards as well as that of the Italian
corporate governance system.
PARMALAT CASE
 The Parmalat case epitomizes the most important problem
traditionally associated with continental European governance
structures, namely a controlling shareholder that exploits the
company rather than monitoring its managers.
 Parmalat’s management structure was openly deficient,
unlike Enron’s, which apparently was well designed.
 Despite this deficiency, Parmalat enjoyed an investment
grade credit-rating, and was able to borrow increasing
amounts of capital from investors.
PARMALAT CASE
Parmalat’s collapse
 It had been suggested (Financial Times, 22 December 2003:
18) that part of the problem was that Parmalat was a familyowned business and its operations were opaque, even though
it had had a listing on the Milan stock exchange since 1987.
 Parmalat financial problems can be traced back a number of
years before 2003, yet the group had apparently managed to
convince banks, investors, financial regulators and the public
that it was a healthy company.
PARMALAT CASE
Parmalat’s collapse
• However, as events unfolded in the months
following the December 2003 collapse, it
emerged that concerns were being expressed
several months before the collapse.
• One of the features of the Parmalat Group was
its
complicated
organizational
structure,
including over 170 subsidiaries.
• Substantial funds were moved between these
subsidiaries, some of which were registered in
the Cayman Islands, a tax heaven, thus increasing
the difficulty of monitoring cash flows and
assets.
 Early on in the investigation, prosecutors were helped by
a Parmalat employee who had disobeyed instructions to
destroy sensitive documents and had handed over a
computer and disks to investigators.
 As the investigation got under way, it was found that
Parmalat had established a network of subsidiaries
through which it had been able to channel substantial
amounts of financial resources. It proved difficult for the
administrator to establish the full extent of these
offshore transactions.
PARMALAT CASE
Parmalat’s collapse
 By August 2004, Enrico Bondi had decided to extend his
legal actions against some of the banks who had assisted
Parmalat in issuing bonds and loans. It was revealed that
the administrator was pursuing Deutsche Bank, USB
and Citygroup for substantial compensation.
 Enrico Bondi and Italian prosecutors believed that
Deutsche Bank, Bank of America, Citygroup, USB and
some other financial institutions had been aware of
Parmalat’s weak financial position before it finally
collapsed in December 2003.
PARMALAT CASE
Parmalat’s collapse
• All Parmalat’s financial statements had been falsified
for a long time, although it is still not clear from
exactly when. Both the poor performance of the core
business and the exceptional amount of cash
siphoned off by the Tanzi family over the years,
when combined with the terrible results of the
tourism business and the other activities of the Tanzi
family (e.g., the football business), had created a
mountain of debt that went out of control.
PARMALAT CASE
The Fraud
 Parmalat hid losses, overstated assets or recorded nonexistent assets, understated its debt, and diverted
company cash to Tanzi family members.
 In order to hit losses, Parmalat had used various whollyowned entities, amongst which, the most significant was
Bonlat, the Cayman Islands subsidiary of the Group
existing during its final five years, and the holder of the
Bank of America’s false account. Typically,
uncollectible receivables were transferred from the
operating companies to nominee entities, where their
real value was hidden.
PARMALAT CASE
The Fraud
 Fictitious trades and financial transactions were organized to
offset losses of operating subsidiaries and to inflate assets and
incomes.
 Securitization schemes based on false trade receivables and
duplicate invoices were recurrently used to finance the group.
 Parmalat understated its debt through different fraudulent
schemes: it recorded non-existent repurchases of bonds, it
sold receivables falsely described as non-recourse, in order to
remove the liabilities from the records.
PARMALAT CASE
The Fraud
 The Milan Stock Exchange’s listing rules require listed
companies to illustrate their corporate governance system.
 Those companies that have decided not to follow the
Corporate Governance Code’s recommendations, issued by
Borsa Italiana in 1999 and emended in 2002, have to justify
this choice.
 The Code recommends the appointment of independent
directors, a concept which is loosely defined and frequently
misunderstood in practice.
PARMALAT CASE
Parmalat Board’s of Director
 In its first report, dated 2001, Parmalat declared that four
of its thirteen directors were independent, but did not
mention the relevant names. It gave the names in 2002.
 As far as 2003 is concerned, amongst Parmalat’s thirteen
directors, eight were executives: they were Calisto Tanzi
(CEO) and his son Stefano, his brother Giovanni, his
nephew Paola Visconti, the company’s CFO Fausto
Tonna and the top managers Luciano Del Soldato,
Alberto Ferraris, and Francesco Giuffredi.
PARMALAT CASE
Parmalat Board’s of Director
PARMALAT CASE
Parmalat Board’s of Director
• It is clear that during Parmalat’s history non-executive
directors had never supervised managers.
• The complexities of the group’s structure and finance
required a great amount of work and financial
understanding, and the non-executive directors were
not prepared to dig into Parmalat’s intricate business.
They probably relied on Tanzi.
 As with Enron, the Parmalat case demonstrates a clear
case of gatekeeper failure. Within the Parmalat group the
most important reputational intermediaries that acted as
gatekeepers were the board of statutory auditors, the
external auditing firm, and the internal control
committee.
 In the Enron case, not only did senior management take
advantage of US accounting standards’ limitations to
manage its earnings and balance sheet, but also its
financial statements did not conform to existing US
GAAP..
PARMALAT CASE
The Failure of the Gatekeepers
PARMALAT CASE
The Failure of the Gatekeepers
• This differentiates the Parmalat case from its American
counterpart. Few accounting issues were found at
Parmalat. There is little evidence that Parmalat’s
financial statements violated the letter of the adopted
accounting standards, although they clearly violated
the overall “spirit”, since the overriding “true and fair
view” objective was not pursued.
PARMALAT CASE
Political reactions to the Parmalat scandal
 The Parmalat scandal is the subject of political debate
concerning the distribution of power amongst Italian
supervisors.
 The Bank of Italy was attacked for not having screened
Parmalat’s issues on the bond market under Article 129 of the
Consolidated Banking Law. It was also criticized for failing to
discover the true nature of the information provided by
Parmalat regarding its debt, given that the Bank of Italy
manages the so-called “Centrale Rischi”, a data bank that
classifies bank debts.
PARMALAT CASE
Political reactions to the Parmalat scandal
• The Italian Parliament created a joint committee for
the analysis of the Parmalat collapse and the drafting
of a new law concerning capital markets, a sort of
Italian Sarbanes-Oxley Act.
PARMALAT CASE
Political response
 The political response to the Parmalat scandal was
overshadowed when another scandal hit Italy: the BPI affair,
concerning an alleged concert action orchestrated by Banca
Popolare Italiana (BPI) in order to gain control of Banca
AntonVeneta, defeating a bid by ABN Amro.
 This scandal was eventually to bring down the Bank of Italy’s
Governor, Antonio Fazio, who was accused of favouring BPI
and, in particular, its chief executive, Giampiero Fiorani.
PARMALAT CASE
Political response
• The B.P.I. scandal had allegedly launched (with a
cohort of conspirators) large insider trading operations
when its own bank undertook large capital markets
transactions. The Italian Parliament under pressure
again and close to the end of its term, enacted a new
law (28 December 2005, No. 262) that can be seen as
an equivalent of the Sarbanes-Oxley Act.
EVALUATING REGULATORY
RESPONSES: THE US AND THE UK
 It is interesting to consider various reforms, both actual and
proposed, that have been prescribed in the Anglo-American
context. At the core of this discussion must necessarily be the
Sarbanes-Oxley Act.
 It is necessary to understand the three regulatory mechanisms
that are at the core of the post-Enron reform debate:
1. Strengthening shareholder rights
2. The reform of accounting regulation
3. Increasing the role played by non-executive (or “outside”)
directors.
REFORMING EU COMPANY LAW AND
SECURITIES REGULATION
 In addition to difficulties generated by the issues that have
proved controversial in the US, the European reform agenda
faces several unique challenges.
 The most fundamental stems from the fact that the EU
encompasses a diversity of systems of corporate governance.
 There is a divide between the UK’s “outsider” share ownership
and the “insider” share ownership of continental Europe, with a
corresponding difference in the emphasis of regulation between
rendering management accountable and keeping blockholders
under control.
 In the spring of 2002, even before any problems had
surfaced at Parmalat, the European Commission asked
their High-Level Company Law Expert Group to
prepare a report elaborating any necessary EU
legislation in the field of corporate governance.
 A particularly important issue for the High-Level Group
concerned the role and structure of the board of
directors, the relevant proposals for which have now
been incorporated into a Commission Recommendation.
REFORMING EU COMPANY LAW
AND SECURITIES REGULATION
 The Expert Group/Action Plan’s philosophy of focusing
legislative energies on core issues for which consensus might
be achieved, and the greater use of non-binding
recommendations, can be seen as part of an emerging trend.
 European policymakers are becoming both more sensitive to
the different capabilities of various regulatory techniques both
to overcome political obstacles and to achieve regulatory
goals.
 In Europe, the scandals have provided the impetus for
surmounting political obstacles to the reform of corporate and
securities law at the EU level.
REFORMING EU COMPANY LAW
AND SECURITIES REGULATION