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How Parmalat Went Sour Essay

1212 words - 5 pages

Here's the skinny on Europe's enormous financial scandalIn the wake of the financial scandals at Enron, WorldCom (MCWEQ ), and Tyco International (TYC ), European chief executives smugly insisted no such fraud could ever occur in Europe. They spoke too soon. The accounting calamity at Italian dairy-foods giant Parmalat has prosecutors scrambling to find out what happened to $8.5 billion to $12 billion in vanished assets. That sum makes Parmalat one of the largest financial frauds in history. Some questions and answers about the collapse of what was once considered a jewel of Italian capitalism:ADVERTISEMENTWhat triggered the financial crisis?Parmalat defaulted on a $185 million bond payment in mid-November. That prompted auditors and banks to scrutinize company accounts. Some 38% of Parmalat's assets were supposedly held in a $4.9 billion Bank of America (BAC ) account of a Parmalat subsidiary in the Cayman Islands. But on Dec. 19, Bank of America reported that no such account existed. In the ensuing investigation, Italian prosecutors say they've discovered that managers simply invented assets to offset as much as $16.2 billion in liabilities and falsified accounts over a 15-year period, forcing the $9.2 billion company into bankruptcy on Dec. 27. Trading in Parmalat shares was suspended the same day.Why is the Parmalat scandal important?It reveals an alarming lack of transparency at one of Europe's largest and most global companies. Parmalat has 36,000 employees in 30 countries, and it does $3.3 billion in business in North America, where it not only sells its trademark milk-in-a-box but also owns Black Diamond Cheese, Archway Cookies LLC, and Sunnydale Farms dairy. Parmalat's shares traded in New York and it sold more than $1.5 billion in bonds to U.S. investors. The U.S. Securities & Exchange Commission has sued Parmalat for misleading investors in a "brazen fraud." The scandal is also a fresh blow to the international accounting industry. Parmalat's auditor from 1990-99 was the Italian branch of Grant Thornton International, one of the largest of the so-called second-tier U.S. accounting firms. In 1999, Parmalat was forced to change its auditor under Italian law, and it replaced Grant Thornton with the Italian unit of Deloitte Touche Tohmatsu. However, Grant Thornton continued to audit Parmalat's offshore entities -- a web of financial companies that were closed down in the Dutch Antilles in 1999 and reestablished in the Cayman Islands. Neither firm uncovered what investigators say was years of blatant accounting fraud. Grant Thornton has issued a statement calling itself a "victim" of the deceit. Deloitte points out that it first raised questions about Parmalat's accounts on Oct. 31.How did the company misplace $4.9 billion?Auditors first inquired about the Cayman Islands account in December, 2002, and received a letter on Bank of America stationery in March, 2003, confirming the existence of the account. The letter was apparently a...

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