Parmalat

Italian law mandated public company to have audited financial statements by independent firm

Parmalat suffered large losses from television broadcasting attempt to compete with Berlusconi's networks and earliest international venture, Brazilian subsidiary established in 1970s; Tanzi & Tonna increased the scope and magnitude of the fraud from increasing losses of Brazilian subsidiary

Fought off takeover attempt by US-based Kraft Foods

Aggressive acquisition program to become major international food distributor

Six international accounting firms in 1990 called the Big 6 but subsequent merger and AA demise created Big Four, which audited more than 95% of all required companies to be audited by Consob or other government mandates

Parmalat retained GT as auditor when went public in 1990

Christian Democratic Party (Democrazia Cristiana) dominated Italian politics for 5 decades after WWII with Tanzi as an important leader and financial support; in early 1990s, the Party collapsed after a political scandal and Silvio Berlusconi, Tanzi's rival, became Prime Minister for 3 non-consecutive terms

Company went public on Milan Stock Exchange, Italy's largest securities market

Floated 35 bond issues, several exclusively marketed in the US

Senior member of GT audit team confessed awareness of large "hole" as early as 1997, but CFO convinced him that the "hole" would be filled in 3 years by profitable operations

Forced to replace GT in 1999 and chose D&T, who was the auditor when accounting fraud exposed in late December 2003

Majority of reported assets were a product of Account 999 by later 2003; "trash bin for fake revenues, assets, and profits"

Consob asked D&T about suspicious items but D&T less than candid

More than 36,000 employees and operations in 30 countries; Tanzi wanted to become the "Coca-Cola of milk" (12B glasses of Parmalat milk consumed annually)

200 interlocking corporations and subsidiaries including 20 finance companies, which thwarted government oversight that was deeply resented in Italy

Institutional investors and large investment firms (Lehman Brothers and Merrill Lynch) questioned Parmalat's borrowings with billions in unrestricted cash

Parmalat officials mistakenly admitted to difficulty in paying off a small bond issues, which triggered more questions and issues

Tanzi visited Prime Minister Berlusconi privately in Rome one month earlier for emergency government loans or loan guarantees; BOA revealed fictitious $5B cash account, causing bankruptcy and placement under government-appointed management team

Claudio Pessina, financial accountant for large Italian food conglomerate Parmalat, was ordered by CAO Luciano Del Soldato, the immediate supervisor, to destroy his laptop with a large hammer

Parmalat filed for bankruptcy on Christmas Eve, 2003

Tanzi indicted and arrested for fraud; business press compared to Enron, almost exactly 2 years prior, as "castle of cards"

Italian law enforcement arrested Del Soldato and 7 other executives for being involved in the largest accounting fraud in European history (1.5% of Italy's GNP, which was a much larger impact on Italy's economy than Enron or WorldCom on the US economy; fraud for more than 15 years; overstated assets by $16B; understated liabilities by over $10B; recorded $5B fictitious cash from BOA deposit; used mysterious inter-company account, Account 999, as virtual garbage dump for fictitious assets)

Italian law allowed audit committee instead of board of statutory auditors, which can issue annual audit report in addition to auditors'

New government-appointed management team chose PwC as new auditor

Fausto Tonna, former CFO, convicted to 30-month sentence, but converted to community service

IFRS required since January 1, 2005; one minor difference between US and Italian auditors' responsibilities

Judge Lewis Kaplan, federal judge in Manhattan US District Court, issued ruling on "one firm" argument, which was "dawn of "one international accounting firm liability"

Posting modest operating profits and listed on Milan Stock Exchange

D&T agreed to pay $149M to settle lawsuit against former bondholders

Tanzi sentenced to 10 years but reached age 70 one month prior to sentencing, so very unlikely to serve sentence even if appeal denied

Ironically, Judge Kaplan dismissed same bondholders' claims against GT as losses due to misconduct of Parmalat's management

Judge Kaplan issued ruling on "one firm" argument that "parent can't hide from misdeeds of its children"

DTT organized as Swiss verein, German term for union or voluntary association of businesses or not-for-profits, and best known verein worldwide; in 2010, reorganized as private company under UK laws