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Men in Suits

Parmalat Scandal

The Parmalat scandal is infamously one of the biggest financial scandals in the corporate history of the world. The scandal sent waves of shock through Europe and had become a talking point for both the national and international press. It highlighted the plight of the Italian governance system and made its way to the list of the largest corporate governance failures. Let us now understand the facts of the case and the reasons for Parmalat’s fall.


Parmalat was an Italian company incorporated in 1961. Initially, it began as a small family-run dairy farm in northern Italy but gradually it transformed into one of the largest dairy companies in Italy. Parmalat was a gigantic name in Italy. The company’s operations later started expanding in several countries and it soon became a multinational conglomerate. By 2003, Parmalat had 214 listed subsidiaries in 48 countries. The company had around 36,000 employees and reported a turnover of about 7.6 billion euros in 2002. December 2003 turned out to be a nightmare for Parmalat as the ugly frauds of the company started to come to the limelight.

However, in the beginning, except for Merill Lynch, the investment firms failed to spot the fraud. In fact, in 2002, when analysts started issuing reports on their opinion of Parmalat, 21 out of 29 gave the company a "buy" rating, 7 gave a "hold" rating and only Merill Lynch issued a "sell" rating. The analysts at Merrill Lynch, Joanna Speed and Nic Sochovsky, expressed concerns over the willingness and ability of Parmalat to issue debt in the public markets. The analysts published a report titled "The Straw That Breaks the Camel’s Back," which highlighted the company’s suspicious situation. They brought to light a significant fact that despite the company having a lot of cash on the balance sheet, it was still heavily on the look for funding from the debt markets. They also pointed out the inefficient balance sheet management because, on the one hand, the books had huge cash balances that paid only little interest but on the other hand, the books also showed substantial sums of debt, which required higher interest payments. It was only later found out that the cash balances were large because they were fraudulently inflated, whereas the debts were highly understated.

A few others also expressed concerns over the company’s debts. Owing to these negativities, the stock price of Parmalat saw a dip of around 40% between November 2002 and February 2003. The fraudulent activities of the company then started to unfold step by step. On 11, November 2003, auditor Deloitte and Touche refrained from signing the company’s half-yearly financial statement as it was doubtful about a 135 million euro gain proclaimed by the company to have arisen out of a derivatives contract owned by its hedge fund subsidiary in the Cayman Islands named Epicurum.

In early December 2003, Bank of America cleared the air on a document which purported that the bank held four billion euros for Parmalat’s offshore unit Bonlat in the Cayman Islands as false. The document, in fact, was prepared by none other than Parmalat, who went to the extent of forging the signature of a bank employee. This subsidiary, Bonlat, was a shell entity of Parmalat used by the company to manipulate the accounts. One example is regarding the claims of this Cayman subsidiary, which showed the sale of an extraordinarily large quantity of powdered milk to Cuba over a single year. The quantity equates to a production of 55 gallons of milk per individual on that island. The transactions seemed unreal. Parmalat also strategically used its other shell entities to cover up its large stack of debts.

The company reported cash and short-term assets worth 4 billion euros on its balance sheet. However, despite its worth, it was unable to make a Eurobond payment of 150 million euros in December 2003, which further raised suspicions. As a result of this, its bond rating was downgraded, further dipping its stock price by another 40%. This is when the founder and CEO of Parmalat, Calisto Tanzi, stepped down from his position. Parmalat realised the crisis it was in and with the hope of turning things around, the board appointed an expert, Enrico Bondi, who could not really do much to save the company. He engaged with PwC to get a clear stance on the books.

On 19, December 2003, the company made a public announcement stating that the 3.95 billion euros of cash on its balance sheet were missing. The company, which also claimed that it bought back 3.6 billion euros in outstanding bonds in 2003, was revealed to be untruthful by the investigators. This sent the investors into a frenzy and its stock price dramatically fell to zero. The executives tried to destroy all evidence related to the off-balance-sheet transactions. The company was officially declared insolvent on 27, December 2003, followed by the arrest of Tanzi.

Why and how did all this happen?

A desperate need to hide losses since 1990

The fraud was put into motion in 1990. It is shocking how they pulled it off for thirteen years, until 2003. The financial performance of the company started plummeting in 1990. However, instead of showing a truthful picture of its financial performance, it opted for multiple ways to hide it. The finances were heavily misstated. It resorted to fraud and collusion to conceal the real status of the company. The company’s stock had gone public in 1990 and this was when they felt the pressure to live up to the expectations of investors and the international market, which must have triggered the company to engage in such deeds. PwC revealed that out of the 13 years, the company was in losses for 12 years, much contrary to what was reflected in the financial statements.

Altered books of accounts

According to investigations, Parmalat started manipulating its books in 1993. On their books, they registered profits, whereas, in reality, they were incurring financial losses each year. The company wanted to build a false image of being an extremely successful and profitable organisation so that more and more people would invest in it.

Fictitious transactions

In order to inflate revenues, the company created numerous fake transactions through a double-billing scheme. Parmalat showed a number of fake sales and receivables from those sales in the books. Their efforts were directed towards falsely making the company look financially attractive. This would lure the bank personnel to grant more loans to the company. Shockingly, a lot of employees at Parmalat were aware of such misconduct. During investigations, an employee from Parmalat named Claudio Pessina stated that as many as 300 employees were aware of the company’s double-billing scheme.

Financial engineering

The company engaged in financial engineering with the help of investment bankers, through which it moved debt off-balance sheet or disguised it as equity on the balance sheet.

A series of purchases

Tanzi purchased Parma Football Club (PFC) in 1991. He appointed his son, Stefano, as a board member of Parmalat and also the president of the football club. Because PFC was bought by a popular conglomerate, it gained popularity in a short span of time but eventually incurred huge losses to the extent of 77 million euros in 2002. It also bought a club named Audax Italiano in Chile.

Tanzi also made other purchases, like Odeon TV Network, which again proved to be a disaster due to huge losses. He spent 130 million euros to purchase Odeon TV but had to sell it off for around 30 million euros. Tanzi had huge debts payable, which he had personally guaranteed over Odeon TV. Later, after the company’s collapse during criminal investigations, it was revealed that the debts were settled using Parmalat’s funds through complicated financial transactions. The Tanzi family’s company that was holding Parmalat’s shares, Coloniale, used its controlling strength as a consideration that did not involve cash to raise capital for Finanziaria Centro Nord, a public company that later became Parmalat Finanziaria. The complex group structure of Parmalat was difficult to understand for almost everyone. This is also reflective of a corporate governance loophole that if a company’s structure is complicated, the major shareholders can exploit this complexity to perpetuate fraud and oppress minority shareholders.

The company continued its expansion spree by also venturing into the tourism industry. Tanzi put his daughter Stefania in charge of the tourism business. In 1992, Parmalat began acquiring competitor companies in many countries, such as Brazil, Argentina, Hungary, Italy and the US. Later, within a span of two years, between 1998 and 2000, Tanzi bought around 24 companies. Parmalat had a strategy of holding huge cash reserves to be used in mergers and acquisitions while at the same time financing its cash needs through bonds, with little accountability to stakeholders.

Obtained bank loans

Parmalat kept on misrepresenting its books of accounts as profitable; this helped them obtain bank loans. The banks, too, found the accounts convincing enough to grant loans to the company. In 1997, Parmalat managed to obtain a loan worth $1.7 billion from the Bank of America through bonds and private placements for US investors.

A change in the external auditor

Italian law permits a company to change its external auditor once every nine years. The company had mala fide intentions to conduct some accounting frauds. Parmalat decided to use this law as a golden opportunity to its advantage. The company’s external auditor was Grant Thornton since 1990. It decided to replace the auditor with Deloitte and Touche in 1999. However, even after a new external auditor was appointed, Parmalat continued to retain its relationships with its old auditor Grant Thornton, who made illicit payments to Parmalat as part of a well-planned strategy. Parmalat created debts and took assistance from Grant Thornton to create fake accounts, which were used to pay Parmalat. It is also believed that Thornton knew about the mischievous transactions of the company’s shell entity in the Cayman Islands.

Role of Auditors

The accounts of Parmalat, which appeared too good to be true, were easily signed by the auditors without proper introspection. It is said that the auditors were paid handsomely by Parmalat and this is the reason they were simply puppets of the company and did not fulfil the role of auditors with diligence and honesty.

Role of Chief Financial Officers (CFOs)

The then-CFO of the company in 2003, Messrs. Fausto Tonna, resigned in the following year. Alberto Ferrari and Luciano Del Soldato, who replaced Tonna, admitted in their statements that the whole scandal was planned by Tanzi and Tonna.

Other significant corporate governance loopholes

Lack of independence of non-executive directors- In Parmalat’s accounting report dated 2001, the company declared that out of its thirteen directors, four were independent but it failed to reveal the names of these independent directors. It was later found out that one such director had worked as a senior manager with Parmalat since 1963. Additionally, eight executive directors mostly included Tanzi and his family members. In a set-up like this, board members can easily be influenced to make biased decisions.

Role of Chairman & CEO not separate- Tanzi held the positions of Chairman as well as CEO. A Chairman is supposed to impose his will on management led by the CEO. The Chairman of the board and the board are endowed with responsibilities to decide on the hiring, firing, evaluation and compensation of the management, which also includes the CEO. If both roles are held by one individual, the effective execution of the roles becomes difficult as personal interests barge in. Thus, a separation of the two positions is recommended as it would lead to better management and oversight.

Failure to comply with Italy’s corporate governance code- Italy’s laws require that if a certain group of shareholders controls a company, then it becomes extremely important that some of the directors be independent of the controlling shareholders. However, Parmalat failed to do so and also could not justify its failure.

Lack of an effective monitoring system- The monitoring system was corrupt to the core, which bred fraudulent activities, abuse of power and greed.


Tanzi was arrested on the grounds of misappropriating millions of euros. Both the judiciary and the government agreed that Tanzi had been instrumental in falsifying the company’s accounts since 1990. Tanzi, too, admitted the charges. He also confessed that he funnelled close to 500 million euros to his family-owned companies. The Italian police also arrested a senior executive of the finance, accounting and legal departments of the company.


It is estimated that the scam amount exceeded 10 billion euros, thus making it one of corporate history’s most brazen frauds. It constantly draws comparisons to the Enron scandal in the US, as in both frauds, the effectiveness of the company board, audit committees, auditors, banks and rating agencies is highly questioned. It is shocking how this corporate corruption was pulled off. The scam highlights the role of corporate governance in the failure of corporations. Weak corporate governance was a major reason for the collapse of Parmalat. Parmalat’s management failed to articulate the principles of corporate governance in the company’s environment. The auditors failed to exercise due professional care. The government also failed to enforce the necessary regulations.

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