Within days of his arrival at the company, Frank Bondi saw events move faster than even the shrewd Mr Bondi could have predicted. First, Calisto Tanzi, Parmalat’s founder and boss, was ousted in a brutal show of strength by the company’s main banks. Then Mr Bondi began to uncover the truth behind Parmalat’s strange balance sheet, and a bad story got much worse.
The immediate problem at the company had been one of short-term liquidity. As a regular heavy user of the bond markets, Parmalat had been criticised as being inefficient for its habit of carrying large debts that were supposedly offset by big cash holdings.
Suddenly in December, it struggled to redeem a €150m ($180m) eurobond, despite apparently having already bought back much of the issue. Financial markets wondered why the redemption was a problem for a group with more than €4 billion of reported cash and short-term assets. Investors then panicked when Parmalat admitted that it had been unable to release almost €500m trapped in a mutual fund based in the Cayman Islands.
Parmalat issues press statements on the scandal. The EU gives information on laws and regulations on financial reporting and company law such as auditing, accounting and corporate governance. See also the International Accounting Standards Board and the International Federation of Accountants.
That was when Mr Bondi arrived. He quickly discovered that Parmalat had overseen a huge and long-running deception, perhaps dating back nearly a decade. The Tanzi family lost control of the company as forensic accountants got down to work. Mr Tanzi went abroad, but was arrested for questioning on Saturday December 27th when he returned to Italy.
On Monday, Parmalat’s by now almost worthless shares were suspended indefinitely on the Milan stock exchange. A full-scale judicial inquiry is under way, with some 20 people under investigation. And America’s Securities and Exchange Commission has accused Parmalat of misleading bond investors in “one of the largest and most brazen corporate financial frauds in history.”
Colleagues of Mr Tanzi, including a former finance director, have alleged, according to investigating magistrates, that he personally siphoned up to €800m from Parmalat. Mr Tanzi’s lawyer denies that any money has “disappeared”. Mr Tanzi did have a penchant for buying football clubs, but his lifestyle was reportedly not especially lavish. Even if this specific allegation against him turns out to be true, it would not explain the billions more that have gone missing.
So where were Parmalat’s auditors during all of this? Grant Thornton were long-time auditors of Parmalat itself and have remained auditors of Bonlat, a Parmalat subsidiary. Deloitte & Touche, Parmalat’s main auditor since 1999, insists that it abided by Italian accounting standards and is co-operating fully with investigators. For its part, Grant Thornton has claimed that a letter from Bank of America vouching for €4 billion of cash in Bonlat was a forgery good enough to fool them into approving accounts that were fake.
But there were numerous such documents. Indeed, investigating magistrates claim that four times a year Parmalat was operating a crude, but effective, system for forging documents that purported to show big cash balances within Bonlat. The balance sheets of the subsidiaries were simply adjusted to make sense of the group’s overall financial position, and then reported to the centre as audited numbers.
Grant Thornton claims that it too was the “victim” of a fraud. But it seems either to have been too close to its client or to have been incompetent. For example, investigating magistrates say that, according to former finance officials with Parmalat, the auditor used Parmalat’s internal mail to request financial information, rather than dealing with banks or other parties directly. If so, this would mean that vital transactions were not scrutinised outside a closed loop of communications.