ABCD
COSO case study
Case study – Parmalat
The situation
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Parmalat is a multinational Italian dairy and food corporation
The company was founded by Calisto Tanzi, a university dropout who transformed a family business, Calisto Tanzi & Sons - Salamis and Preserves into an organisation hailed as one of Europe's biggest corporate success stories.
In 1997 Parmalat jumped into the world financial markets in a big way, financing several international acquisitions with debt.
By 2001, many of the new divisions were producing losses , and the company financing shifted largely to the use of derivatives.
Parmalat had determined that their company wide objectives was to become the leading global company in production of UHT, however, a risk assessment of financing several international acquisitions with debt and derivatives was not performed.
There was also a concern that the managers who were making the accounting decisions, were also posting the journals to the general ledger. Furthermore, they were reviewing and signing off on the reconciliations and reporting
In February 2003, CFO Fausto Tonna unexpectedly announced a new €500 million bond issue. This came as a surprise both to the markets and to the CEO, Calisto Tanzi. Tanzi fired Tonna and replaced him as CFO with Alberto Ferraris.
Ferraris was surprised to discover that, though now CFO, he still didn't have access to some of the corporate books, which were being handled by the Chief Accounting Officer,
Luciano Del Soldato.
He began making some inquiries and began to suspect that the company's total debt was more than double that on the balance sheet.
It was identitifed that there was a lack of validity checks to confirm the accounts actually existed, resulting in inaccurate information being reported.
The crisis became public in November when questions were raised about transactions with mutual fund Epicurum, a Cayman-based company linked to Parmalat causing its stock to plummet. Ferraris resigned less than a week later and was replaced by Del
Soldato.
In December, Del Soldato resigned, unable to get cash from Epicurum fund, needed to pay debts and make bond payments. The company, who had 36,000 employees, was supposed to be sitting on €3.95 billion in cash, so the Italian bankers were puzzled by its predicament of a cash shortage.
Enrico Bondi was called in to help the company. Tanzi himself resigned as chairman and
CEO.
Parmalat's bank, Bank of America, then released a document showing €3.95 billion in the bank account of Parlamat’s Cayman Island subsidary, Bonlat, as a forgery.
Prime Minister Silvio Berlusconi initiated a fraud investigation and appo inted Bondi to administer the company's rescue.
It was identified that the Parmalat board comprised nine insiders, one affiliated outsider, and only three independent directors. Parmalat was also weak on the composition of key board committees. Insiders sat on each key board committee. Moreover, members of
Audit and Remuneration Committee also sat on the Executive Committee with founder and boss Tanzi. The executive committee, which consisted of company executives, proposed actions for board approval and t hen implemented them.
What are the issues?
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Parmalat is suspected of having perpetrated a massive fraud. Billions of euros have gone missing from its books in a scandal that has drawn parallels with the collapse of Enron, the US energy giant.
Parmalat had been using its assets to offset more than a decade’s worth of liabilities through a network of offshore and foreign finance companies. The problem, however, was that these assets did not exist. Furthermore, bank accounts at the Bank of America were determined that they, too, did not exist.
The company has admitted that the true level of its debt is €14.3bn (£10bn) - eight times more than it claimed.
ABCD
COSO case study
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Parmalat's primary auditor was Deloitte & Touche, but the Milan branch of Grant Thornton dealt with some of the company's subsidiaries, including Bonlat. When Grant Thornton checked with Bank of America, the auditor received a letter on Bank of America letterhead confirming the existence of the account. However, Bank of America said the letter was forged.
The outcome
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The CEO, Tanzi, has been sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in S eptember
2008.
Shares in the company, which once had a market value of €1.8bn, are worthless, so millions of investors are out of pocket.
Bank of America is thought to have provided between $150m (£84m) and $250m in loans to Parmalat, but those are trivial sums for America's third biggest bank.
Control environment
The Board contained 9 Insiders and 1 Affiliated member, and only 3 independent directors. The ability for the Board to work effectively was minimised.
The members of the Audit and Remuneration Committee consisted of Executives, the
Owner and the CEO. There was reduced ability to independently challenge financial reporting and audit outcomes.
There was limited segregation of duties/authority/responsibility between the executive and the Board.
CFO (Alberto Ferraris) did not have access to key financial reporting systems that were being handled by Chief Accounting Officer.
Analysis
Risk assessment
ABCD
COSO case study
There seems to be an absence of assessments of internal and externa l factors before undertaking acquisitions using debts and derivatives. Factors include production losses, and issue of debt without appropriate assets.
Control activities
The managers who were making the accounting decisions, were also posting the journals to the general ledger. Segregation of duties.
Same people were reviewing and signing off on the reconciliations and reporting.
Segregation of duties.
Inadequate validity checks to confirm accounts and account balances. Reconciliations etc. System access controls were weak giving individuals access to create and amend accounts, post and approve transactions.
Information and communication
There was restricted information available to the CFO as he did not have access to the records. Limited reporting around the accuracy of the cash balances.
Inadequate systems and data validations for completeness and validity. There were no checks to confirm the accounts being created and hidden.
Monitoring
There was a lack of independent monitoring at Parm alat. The boards were not truly independent and not truly vigilant.
The Audit and Remuneration Committee was inadequately separate to challenge and review the ongoing operations of executives and management.
There is limited evidence of independent checks of key controls such as independent reviews of reconciliations and reporting. 