Parmalt CaseEthical Code Of Conduct

Introduction To The Organization

• Parmalat is a multinational Italian dairy and food corporation.• Italy’s 8th Largest Industrial company.• The Parmalat Group is a global player in the production and

distribution of foods that are essential for everyday wellness: ->milk, dairy products (yogurt, cream based sauces, desserts

and cheese) and fruit beverages.• Generated revenues of about 5.2 billion Euros in 2012. • About 16,000 people work at Parmalat’s facilities in Europe,

the Americas, Africa and Australia. • The Group is present in 29 countries and has 70 factories.

Cont……

• Parmalat has a strong tradition of innovation and develops products with a high value added to improve the diet of its customers.

• The global brands of the Group are Parmalat for milk and dairy products and Santàl for fruit beverages.

• It is in charge of almost 50% of the dairy products in Italy.

• The company's founder and CEO is a man Calisto Tanzi, he is the son of a man who ran a small bakery, but as he grew old, he changed this to an international business in 1961.

Products

Parmalat in Formula One

• Parmalat's name was notable outside Italy in Formula One. • Its name was emblazoned on the cap of Niki Lauda, which he

always wore following his 1976 German Grand Prix accident. • The Brabham Formula One team was sponsored by Parmalat

through some of its most successful years in the late 1970s and early 1980s.

• Owned by Bernie Ecclestone, Nelson Piquet and the Brabham team won two World Drivers Championships while sponsored by Parmalat.

• It also sponsored Pedro Diniz throughout his Formula One career.• Its logo was seen on Forti, Arrows, Ligier and Sauber cars from

1995 to 2000.

Revenue by Region

PARMALAT ETHICAL CODE OF CONDUCT

Parmalat’s Code of Conduct is divided into 3 parts-

• Mission and Values, which sets forth the fundamental principles of the Parmalat corporate culture, there by creating the foundation for appropriate implementation of individual policies and procedures.

• Rules of Ethics, which outlines the areas of responsibility and the behavior that should be followed to remain consistent with the Group’s values and stresses the importance of complying with statutory requirements.

• Implementation, Control and Updates, which identifies the parties responsible for implementing the Code of Ethics and explains in practical terms how the Code’s values and rules should be implemented and made part of daily practice.

PARMALAT SCANDAL IN BRIEF• 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 finances were in poor shape by the late 1980s as a result of disastrous foray into television.

• In 1987,it spent Euro 130mn on a station called Odean T.V which collapse after 3 years.

• In 1997, Company entered into financial market by various acquisitions.

Cont……….

• By 2001, many of the acquisition were producing losses, then company start using derivatives.

• In early 1993 Parmalat began to invent financial transactions to pad its balance sheet.

• It posted profits by fictitious transactions and aggressive acquisitions.

• In Feb 2003, CFO announced issue of bond of 500 million euro, which raised the question against company debt payment.

Cont……..

• The core of the fraud was system of double billing to Italian supermarkets and other retail customers.

• They simply done billing twice for the same shipment of merchandise.

• They created the impression that their account receivables were much larger then they really were.

• From about 1990-2003 Parmalat borrowed money from global banks and justified those loans by inflating its revenues through fictitious sales.

Cont…..

• CFO Fausto Tonna resigned and replaced by Alberto Ferrasis.

• In Sep 2003,fund raising effort of 300 million euro was dropped.

• Company share was depreciated significantly as a result raised over transaction with mutual fund Epicurum.

• The company not able to pay debt of 150 million euro.• Tanzi resigned as chairman and replaced by Mr. Bondi.• Bank of America release a document showing

3.95billion euro in Bonlat’s bank account as a forgery.

CORE ISSUES THAT ARE VIOLATED• Parmalat lacked board independence.• Parmalat is family owned company of Tanzi and Sons, Tanzi is the

founder ,chaiman and CEO of the company.• Parmalat was also weak on the composition of key board

committees.• Parmalat does not have sufficient no. of independent director as

per the SOX (Sarbanes–Oxley Act of 2002).• Both audit committee and remuneration committee is completely

dependent on Tanzi family.

VIOLATION OF LAWS

• The responsibility of both chairman and CEO is not different.

• The holding company controls majority of voting rights which ultimately belongs to the Tanzi family.

• To save from Bankruptcy Tanzi sold Parmalat to a dormant holding company listed in Milan stock exchange.

Cont…..

• Wrong disclosure of financial report. The company was facing debt which is more than double what was disclosed in financial report.

• As per SOX, board should have more than 50% independent directors. But in Parmalat, the board was composed of 3 independent directors remaining are executive directors out of which only one is independent director.

• Lack of monitoring company operation by the board of directors.• Parmalat had 3 internal auditors which were appointed by

company and neither of them appointed by minority shareholder in order to protect their rights.

• Lack of rotation of external auditor, as per Italy corporate governance external auditor should be rotated after 3 years

Roles of Senior Management In Fraud

Chairman and CEO: Calisto Tanzi, who is the founder, chairman and CEO of the company. • No role distinction between CEO and Chairman. • without understanding the company financial condition acquired many companies

in the food industry which result in financial losses.• To hide losses they manipulate financial reports.• Divert 500 million euro from company reserve to Parmatour(which belongs to his

daughter) without taking approval from shareholder and stakeholder.

CFO: Fausto Tonna • Completely dependent on the company internal auditor, not even access company

books which was handled by internal auditor• Announced a bond issue of 500 million euro, without communicating shareholder,

stakeholder and other personals.

Independent directors: Being independent directors of the company did not question the company malpractices.

Cont…..Internal Auditor• Manipulation of balance sheet by reducing debt to half, in order to give company

better financial picture.• In order to cover losses, post profit by representing that company involved in

aggressive acquisition.

External Auditor: Lorenz Penca of Grant Thornton auditor firm, remained chief auditor for 9 years, even Italian government have role of rotation after 3 years.• Not an independent director as related to one the company subsidiary.• Also involved in company fraud and laundering activities.• Company has nonexistent account in Bank of America. Grant Thornton claimed that

this account is existent in order to show third party confirmation.

Senior management: Did not perform efficiently to minimize the risk of company and did not question activities of Executive Director.Executive Directors: company had 7 executive directors, all of them equally involved in company malpractice. They also received compensation for their involvement.

Institutional investors: • Did not found the companies actual financial condition and invest 150 million euro.• Help the company to go public, raised fund from the market.

Bank of America, Citigroup and J.P. Morgan:• Largest bond placers helping Parmalat to fake balance sheet and hide their actual

financial condition.• Bank of America give higher rating to Parmalat bonds based on the fake account which

never existent.• Citigroup and J.P.Morgan help Parmalat to build a fraudulent accounting practice

Deloitte and Toushe: Auditing firms • Even after rotation of external auditor in 3 years, agreed to continue Lorenz Prenca to be

chief auditor of the company.• Allow Parmalat to follow wrong accounting practice and help them to cover fraud.• Regulators were also responsible as they are not able to detect pattern of negligence and

fraud.

FAILURE OF INTERNAL CONTROL MANAGEMENT AND RISK MANAGEMENT

• Internal control and risk management are required to improve the quality of financial reporting.

• These are mainly done by chief executive, chief finance officer and auditing firms.

Parmalat code of conduct defines internal control and risk management as follows:• Verification of the internal control system is working effectively and support the

Board of Directors in defining guidelines for the internal control system. It also supports the Chief Executive Officer in defining the tools and methods needed to implement the internal control system.

• Risks entailed by identifying are adequately monitored and updated on a regular basis, and negative elements that can threaten the organization’s operational continuity must be assessed carefully and protections are adjusted accordingly.

• In Parmalat scandal, each auditor, executive directors, senior management, bankers and auditor firms are involved.

• This ultimately leads to failure of internal controls and poor risk management.

Key Issues

Ethical Issues• The crimes that have been committed are not only illegal, but they go against

appropriate behavior, what has been done is completely wrong. • They have not only lied and shown a form of dishonesty, but the company has

put a lot of people's careers at stake. • The company as mentioned before, has made fake profits and built fake

subsidiaries in order to gain assets and increase accounts. • They have put a lot of investors and many shareholders under pressure. It

does not only financially cause damage, but it shows how the company's CEO lacks integrity and commitment.

• Tanzi has tried to go the easy way to earn profit, and unfortunately he put not only himself but many of his colleagues, friends and family in a big black hole.

• The BOD and CEO are lack in accountability, supervisory skills and strategy formulation.

• Raised question like banks are diligent enough while dealing with Parmalat.• Role function and power of regulators are not sufficient enough to monitors

and enforce guidelines.

Key Issues With The 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.

• There seems to be an absence of assessments of internal and external factors before undertaking acquisitions using debts and derivatives. Factors include production losses and issue of debt without appropriate assets.

Key Issues with 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 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.

Key Issues With Monitoring

• There was a lack of independent monitoring at Parmalat. 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.

The Outcome• A fraud worth $ 8Bn.• All changes in laws and governance are taken in accordance with the fraudulent

activities of Parmalat.• 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 September 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 (£84mn) and

$250mn in loans to Parmalat, those are trivial sums for America's third biggest bank.

• In April 2011 after a three year trial, Milan court acquits four banks – Morgan Stanley, Bank of America, Deutsche Bank and Citigroup of market-rigging.

• Prosecutors had demanded that €120m of the banks’ profits should be impounded

FUTURE STEPS

• The auditors can be hired from a specific firm and be hired under a contract, and there could be people alternating every specified month.

• The Bank should be more precise when giving out loans to businesses.

• The government should have strong corporate governance measurement.

• Imposing strict regulation on independent directors, executive director and auditors.