Parmalat’s Downfall
By: Mary Anne Winslow
It seemed, for a while, that Europe was insusceptible to the wide sweep of scandals that sweep most successful businesses. However, Italian company Parmalat disproved that theory in the latest embarrassment reported a 5 million dollar account that was not only fraudulent but did not exist. This huge disgrace outweighs the other scandals that have swept the US, Enron, WorldCom, Tyco, etc. Parmalat started as a family business producing salami,that branched out to be the champion of Italy’s economy and business world.
Calisto Tanzi dropped out of college when his father died, and came to
run the families small preserved meats business. Early on, Tanzi
decided that the future of the company would be in dairy, and began a
rapid expansion when he was one of the first to aggressively adopt new
ultra high temperature pasteurization and packaging technology that
would allow milk to have a shelf life of over six months without
refrigeration. Parmalat expanded overseas and into other food
markets besides dairy, and by the 1990’s owned companies in over 30
countries and employed over 36,000 employees.
Tanzi never outgrew the style of the provincial business owner, and
managed the company with a parochial nature. The hometown business
hero kept much of the hometown culture from which he expanded, some of
which has been to the company’s detriment. As the business grew, most
of the senior staff were the locals that he had started with in
Parma. While loyalty is an admirable trait, when a local company
becomes a giant multinational corporation, it is important and
advisable to have some seasoned international management. Keeping the
business linked to friends and family was an important trait for
parochial Italian culture, but spelled disaster as Tanzi sought to
rapidly expand. The roots of the scandal may not be exactly the
unabashed greed often associated with such massive scandal, but may be
more rooted in a man who got out of his league, and refused to
relinquish some control to, or seek advice from those with more
experience dealing with a multinational corporation and with rapid
expansion of a business. Ironically, a
Tanzi niece suggested that he needed to start running Parmalat less
like a family firm and more like a global enterprise, and get proper
managers in to deal with the myriad of operations now in place in the
huge firm. However, Tanzi ignored her advice, and kept tight control
of the ever expanding and ever more complicated enterprise, staying
with family and longtime local associates.
Despite the advice of a niece, it was this parochial (perhaps
universal) desire to find a place in the empire for his children that
also narrowed the spectrum of expertise available to advise the growth
of Parmalat. His son, Stefano, was the chief executive for a period,
and made chairman of the soccer club Parma A.C. His daughter,
Fransesca was in charge of the family’s privately controlled travel
and tourism business, Parmatour. It appears that up to $2-3 billion
in diverted funds went to help shore up the struggling Parmatour, and
attempted to cover such actions through accounting fraud.
This cronyism was a contributing factor, not only in the limitations
of management to handle multinational expansion, but also in some of
the easy money that financed it. The close knit Parma culture allowed
for situations in which some of Tanzi’s close associates were placed
in charge of local banks, which in turn would make significant loans
to Parmalat without the close scrutiny that might be associated with a
process made at arms length. This easy money and lack of
seasoned advice from experienced international managers familiar with
the challenges of rapid global expansion set the stage a man like
Tanzi, and a company like Parmalat, to get in over his head and find
the far flung empire quickly spiraling out of control, and then being
overwhelmed and ill-equipped to try to address the situation before it
reached unmanageable proportions.
Bankers who were suspicious steered clear of Parmalat. They saw signs
of trouble as the rapidly expanding company came to the markets time
and time again to raise more cash. The company issued around $8
billion in bonds between 1993 and 2003. Some more astute
analysts (or less blinded by potential fees) found this desire for
more and more debt amidst tremendous stockpiles of cash on the books
as a warning sign that things were not as rosy at Parmalat as the
books might suggest. When questioned about the need for so much
additional debt while flush with cash, the reply from Parmalat’s chief
financial officer, Fausto Tonna (one of the longtime Tanzi associates
thrust from small time Parma to running the finances of a global dairy
giant), was that the company was on an acquisition spree and needed
the cash, and that its liquid assets were already being put to good
use and earning good returns.
Some of the blame for the lack of integrity and diligence on the part
of auditors and accountants may lie in the regulatory environment that
Parmalat operated in. Italy’s Prime Minister Silvio Berlusconi, a
billionaire businessman, only last year reduced false accounting from
a felony to a misdemeanor. Many have long viewed Italy as
less than rigorous in the realm of corporate governance, and the
Parmalat scandal only reinforces those views. In response,
the Italian government has been falling over itself in proposing new,
stricter policies and oversight to help prevent such activities from
happening again. One of Italy’s policies already in place that failed
the test it was designed for, was the requirement to rotate auditors
after four years. This proved inconsequential because the major
accounts in question were subsidiary accounts that continued to be
audited by the same firm, Grant Thornton.
Mary Anne Winslow is a member of Essay Writing Servicecounselling department team and a dissertation writing consultant. Contact her to get free counselling on custom essay writing.