Parmalat SpA, an Italian dairy and food company, declared bankruptcy in late 2003 primarily due to an accounting scandal worth 8 billion euro.
The saga began when Parmalat defaulted on a $185 million bond payment in mid-November 2003. This act made the auditors and banks look more closely at the company accounts. Some 38% of Parmalat’s assets were supposedly held in a $4.9 billion Bank of America account of a Cayman Island based subsidiary of Parmalat called Bonlat. But on Dec. 19, Bank of America reported that no such account existed! And so began the unfolding of the grand scam at Parmalat.
Auditors first inquired about the Cayman Islands account in December, 2002, and received a letter on Bank of America stationery in March, 2003, confirming the existence of the account. The letter was later found to be a well done forgery by someone in Parmalat’s Collecchio headquarters. Also under question was the 2003 buy back of $3.6 billion in outstanding bonds that Parmalat claims to have done, which from the records doesn’t seem to have actually taken place.
Then there was the issue of the company selling itself credit linked notes, in effect placing a bet on its own credit worthiness and in the process creating an asset on its books. A 1999 deal with Citi is a good example of such a transaction. The company did a deal with Citi where the bank made a $146 million “investment” in return for a chunk of the company’s net profit. By setting up the transaction as an investment and not a loan Parmalat made its borrowing costs appear smaller than they actually were and created an asset rather than liability.
The question is where did the billions go? Well the CEO Calisto Tanzi confessed to misappropriating close to a billion dollars and diverting the funds to cover losses in other family owned businesses. From one loss making entity to another loss maker; definitely not a good business move Mr Tanzi!
The final but critical question is who the auditors were and what is their reaction to the scandal? From 1990-99 the auditors were Grant Thornton International. In 1999, Parmalat was forced to change its auditor under Italian law, and it replaced Grant Thornton with Deloitte Touche Tohmatsu. However, Grant Thornton continued to audit Parmalat’s offshore entities. Neither firm uncovered what was years of accounting fraud. The auditor’s response to the scandal; Grant Thornton called themselves the “VICTIM” of the deceit and Deloitte pointed out that they first raised the questions about Parmalat’s accounts on Oct. 31, 2002 (almost 3 years after they first became the auditors!).