Evolving from a small dairy shop into an international concern, Parmalat appeared to be a gigantic and stable dairy producer. At some point in time, it may well have been gigantic and stable, but in December 2003, shocking news was broken to Parma, Italy, and the world at large. Parmalat was no longer a success as it once may have been, and it was bankrupt, and had been bankrupt for several years without this ugly truth being exposed. The truth had apparently been concealed due to a number of people being at least somewhat aware that something was amiss with transactions on the books, but had not spoken out. Through the years that Parmalat was going bankrupt, there were several events that took place before Parmalat’s condition was finally exposed.
To begin with, as early as 1990, there were signs that Parmalat was in debt. In accordance with what has been uncovered, Parmalat’s fraudulent activities are said to have ‘taken off’ in 1990. This was when their stock went public, and reflected the need for a big company like Parmalat to perform in the international market so that their performance improved and met investor expectation.
The following year  head of the Parmalat food group, Calisto Tanzi purchased Parma Football Club of which Tanzi’s son, Stefano, was president, and also was Parmalat board member. With this purchase, the football club rose to fame quickly, but faced large losses that recorded a deficit of over ‚¬77m in 2002. According to investigations, Parma Football Club was the first asset to be sold.
Another set of purchases that went along with purchasing the Parma Football Club included Tanzi buying up his competitors. Once he had established Parmalat Milk in the global market, his financial ventures proved to be devastating. This included his family’s financial interest in football and tourism, as well as his failed attempt to outdo Belosconi when he purchased a TV network, Odeon TV. At this point, Parmalat’s finances were a mess.
Purchasing Odeon TV Network was a disaster as Tanzi had to sell the network off for a around £30m. From this point on though, it is said that Parmalat still progressed in spite of its major losses. This was largely achieved through altering the books and attaining bank loans and investments against falsified figures.
Parmalat had spent ‚¬130 million on Odeon TV, but it collapsed within 3 years. In order to prevent bankruptcy at this point, Parmalat had to sell itself to a company that was already listed on the Milan stock exchange. This helped to produce ‚¬150 million from external investors, and paved the way for Parmalat to be in public view in 1990. It also enabled them to patch up some of its accounts.
It is thought that Parmalat began altering its books in 1993. If Parmalat had not ‘cooked’ its books it would have registered financial losses every year. However, they registered profits, which meant that they would still be viewed as a viable organization and one that was worth investing in. Therefore, they managed to avoid being suspected of any losses and attracted much investment.
Parmalat managed to cover losses through a combination of fictitious transactions and aggressive acquisition. This commenced in 1992, when Parmalat started ‘snapping up’ various companies in Argentina, Italy, Brazil, Hungary and the U.S. However, beyond 1995 it is thought that Parmalat was not able to fund its own needs. Yet it managed to prove to investors that it was registering significant profits. Perhaps, Parmalat’s profits registered were so convincing that the Bank of America alone, in 1997, provided $1.7 billion through bonds and private placements for U.S. investors. It also received $30 million or more as payments and commissions.
One of the main events that lead up to the Parmalat accounting scandal exposure includes the company changing its external auditor. In accordance with Italian law, an external auditor can be changed once in 9 years. So, in 1999, Parmalat, in accordance with Italian law replaced Grant Thornton with DeLoitte and Touche.
Grant Thornton was keen to keep working with Parmalat, which was a high profile company, as it would be good for their reputation still being developed. Therefore, they recommended that Parmalat spin off its travel and other businesses, and permit these to be under them [Grant Thornton]. Such an arrangement would be convenient to both Parmalat itself and Grant Thornton. Through such an arrangement Parmalat could then satisfy its new external auditors [DeLoitte and Touche] with Grant Thornton making illicit payments to Parmalat. This was made possible through the executives at Parmalat creating debts, and Grant Thornton creating false accounts from which Parmalat could be paid. Grant Thornton would then produce these records to DeLoitte and Touche who saw little wrong with them.
Numerous reports reinforce that Grant Thornton was aware of the ‘shell games’ that Parmalat was playing. One example of these games includes case of “cooking the books,” that reports the Cayman Islands subsidiary Bonlat claiming to have sold a large quantity of powdered milk in a span of one year to Cuba. It claimed that this quantity was sufficient to produce 55 gallons of milk for every individual on that island. Another interesting event that lead up to Parmalat’s exposure of the accounting scandal was that Grant Thornton and Deloitte & Touche signed off on its increasingly surreal accounts. In return, it is said that they booked millions of dollars.
In Parmalat’s final weeks, Deutsche Bank had taken on helping it work with Standard & Poor’s, hardly ten days before the exposure. Around this time, analysts around the world kept encouraging investors to continue purchasing its stocks and bonds.
In 1999, finance director Alberto Ferraris laid out a financing scheme. He managed this through a Delaware company known as Buconero. This was the Italian for “black hole,” that Citigroup established for Parmalat in 1999. This company loaned out $137 million to a Swiss subsidiary of Parmalat. From here, the money was transferred to Parmalat companies. In return for Buconero’s service to Parmalat, it received a return of around 6%, in addition to $7 million in payments for Citigroup. Just like Parmalat made use of Buconero, it also used other offshore companies to dress up its debt till the time of its exposure.
Back in 1995, Parmalat also commenced concealing its debt through shell companies. It had been losing $300 million annually in Latin America, and decided to wipe this debt off the company’s financial records. It managed to do so by using 3 shell companies situated in the Caribbean.
The huge debt patchwork through the 90s began to raise concern by the end of the decade. Esteban Pedro Villar, expressed concern and filed an early warning report. This was regarding Parmalat’s Latin American set-ups. He had so many questions that his concerns were termed as “offensive and ridiculous”. Then suspiciously, Deloitte’s Parmalat business in Argentina was terminated. In response, Deloitte was silenced, and the accounts were certified.
In addition to the above concern that was demonstrated by a Deloitte partner in Latin America, there were others. On March 28th, 2003, Deloitte’s Maltese office raised questions regarding a $7 billion intercompany transfer they suspected was fictitious. Wanderley Olivetti, the Deloitte auditor in Brazil, raised such concern at the Milan office regarding Parmalat’s Brazilian accounts that the matter went straight to Deloitte’s chief executive in New York City at that time, Jim Copeland. However, Olivetti’s objections were mysteriously ignored and he was soon removed from dealing with the Parmalat account. Deloitte claims it behaved within its rights to remove any employee it wishes to, and this may be done for a number of reasons. It also said that the investigation of Parmalat started in October 2003, after Deloitte Italy had drawn attention to Parmalat’s financial dealings.
Following the suspicions raised by auditors, Epicurum was established in an attempt to show that Parmalat was due considerable amounts of money. However, this attempt to erase debt from the records at Parmalat failed, and the company admitted that it could not retrieve the amount they were due from Epicurum.
One of the key events that led to the exposure of Parmalat includes Tanzi and his son’s meeting with private equity firm Blackstone Group in New York. Tanzi and his son Stefano, one of the main executives at many of the family’s concerns, met with the Blackstone Group to discuss the sale of 51 percent of the family’s share in the food empire. It was in the course of conversation regarding preparation for the books to be opened to a transition team from Blackstone, that Tanzi and his son slipped out with the fact that the cash on hand was less than the 3 billion Euros registered in the company’s annual report. In addition to this, they revealed that there were barely any liquid assets. They even further stated that the company was in debt of about 10 billion Euros.
In addition to the suspicion that was brought against Parmalat through observations of its faulty accounting records, it is this final attempt to sell of 51 percent of family shares that marks the end of the road for Parmalat’s long trail of fraud.