Parmalat Company’s Fraudulent Financial Activities

The term cooking the books is used to describing a range of fraudulent acts that companies attempt to provide false financial statements. Usually, cooking the books is associated with exaggerating financial data to report non-existent earnings. At the beginning of the 2000s, many Fortune 500 companies have been caught improving their financial figures for maintaining their high positions in the rating. Apart from preserving a corporate image, major companies found an incentive in falsifying financial information for extracting private benefits (Clarke, 2017). For instance, when inflating earnings or omitting debts, managers presented financial information at the expense of their shareholders. Because of this, the Sarbanes-Oxley Act of 2002 was established to create policies targeting the protection of investors against any instances of fraud. However, even with the established regulations, there are still cases of companies cooking the books.

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How Parmalat Managed to Cook the Books

The case of Parmalat is especially notable because of its scope and impact. It was revealed that the company’s executives managed to alter the accounts of all of its bankrupt units worldwide to sweep their losses under the rug. According to the report in The Age, “the alterations of the accounts and the shifting of money involved all the companies of the group and the companies connected to the group” (“Parmalat cooked the books worldwide: Police,” 2004, para. 2). The company’s Chief Financial Officer, Fausto Tonna, was accused of creating a chain of offshore companies with fake assets that supposedly left the Parmalat company group. The entire case ended in Parmalat’s shares being suspended in December 2003, which led to the company having to work at least a decade to get the trust of its shareholders back.

When answering the question of how was it possible for Parmalat to cook the books and hide its true assets from its shareholders, it is essential to look at the issue of accounting transparency. This term means providing a concise, clear, and open view of a company’s financial statements and report them to shareholders. The importance of accounting transparency has received some attention in the light of the recent scandals of falsifying financial information as well as legislation requiring companies to follow specific financial reporting standards.

For companies to achieve greater transparency in their accounting, it is recommended for governments to make reforms in existing rules and for businesses to employ a qualified and active committee on audits (Eun & Resnick, 2015). The issue with Parmalat lied in the fact that it did not have a reliable department responsible for transparent accounting that could have stopped the CFO’s fraudulent activities. Also, Italy was not persistent enough in establishing policies that demand accounting transparency. The combination of transparency-deficient procedures and the absence of governmental regulations to cover this issue allowed Parmalat to cook the books. Fortunately, the fraudulent acts committed by the company’s management were soon discovered and punished; however, the problem of falsifying financial information in reporting has always needed more attention than it got.

Role of International Banks and Auditors

In the discussion about the part international banks and auditors played in Parmalat’s collapse, it is imperative to talk about International Standards on Auditing (ISA). These standards refer to a set of rules and guidelines independent auditors must follow when conducting audits of financial information. Issued by the International Federation of Accountants with the help of the International Auditing and Assurance Standards Board (IAASB), the standards include a range of objectives and requirements necessary for the application in the auditing practice. International auditors should have a full scope of knowledge about the entire set of ISA rules. The list of these rules is extensive due to the need to apply them to a variety of settings and contexts. In the case of Parmalat, international auditors should have followed the following set of ISA rules:

  • “ISA 230: Audit documentation;
  • ISA 240: The auditor’s responsibilities relating to fraud in an audit of financial statements;
  • ISA 265: Communicating deficiencies in internal control to those charged with governance and management;
  • ISA 450: Evaluation of misstatements identified during the audit” (“International standards of auditing (ISA),” n.d.).

International auditors failed to identify the instance of fraud in Parmalat’s financial reporting and were unable to report the problem to the responsible parties, making the issue even more complex to manage. Had they done their due diligence in investigating the correctness of the company’s financial statements and identified whether the company provided truthful statements, Parmalat may not have failed. The scope of forensic accounting investigations on fraudulent activity was defined by the Association of International Certified Professional Accountants (AICPA) and included guidelines on how to proceed with this issue. International auditors should have looked into Parmalat’s financial reports by analyzing internal and external records of the company’s transactions (AICPA, 2014).

The investigation of Parmalat’s case revealed some interesting information about what international banks did. After conducting a series of arrests including those of Calisto Tanzi, his partners from the company Grant Thornton, and several auditors of the company’s seventeen subsidiaries, the Securities and Exchange Commission was investigating the role that international banks could have played in cooking the books. According to the report in The Telegraph by Quinn, Williams, Lilico, and Lynn (2004), “of the 7.5 billion euros of Parmalat debt issued since 1997, about 80 percent was managed by international banks, with up to 50 percent handled by US banks. The rest was handled by domestic Italian institutions” (para. 10). This points to the fact that there could have been some violations that international banks committed or there were not attentive enough to see the financial fraud occurring.

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The Bank of America played an important role in the fall of Parmalat when it refused “to recognize the authenticity of a letter reporting the holding of a cash balance of 3.8 billion euros in the name of Bonlat. Parmalat’s subsidiary in the Cayman Islands” (Quinn et al., 2004, para. 11). The letter was considered forged by the company’s employees, and despite the Bank of America has no prior knowledge about the deception, it had relations with Parmalat, which makes the entire case even more complex. However, the report on the incident revealed that Parmalat did mention the Bank of America having “multiple dealings with the company. Citigroup arranged some structured finance. JP Morgan Chase, Merril Lynch, and Morgan Stanley were all involved in raising funds for the company” (Quinn et al., 2004, para. 15). Overall, both international banks and auditors failed to recognize the fraudulent reporting in which Parmalat engaged. Regardless of whether they were previously aware of the company’s intentions, they should have done their due diligence and prevented Parmalat from issuing false financial information.

Corporate Governance in Italy

Corporate governance refers to the system that guides the processes by which companies are being controlled and directed. The main objective of the system is ensuring the increase in corporate profit and the gain of shareholders while also considering the impact that the profit will have on the stakeholders of the company. As a rule, boards of directors are responsible for corporate governance, and companies’ shareholders usually play the most important role in appointing both directors and auditors. Shareholders act in their interests, so they need to appoint individuals who will create a governance structure that seems the most appropriate.

The board is responsible for setting corporate strategic goals, the provision of leadership to achieve the established goals, the supervision of the management, and the reporting of shareholders (ICAEW, 2018). In Italy, the main entity responsible for making laws on corporate governance is the parliament. Specific regulations are created and established by authorities (e.g., the Italian Stock Exchange), the stock market regulatory authority, and the Bank of Italy. When enacting laws and considering their enactments, the opinions of the Italian Confederation of Industries, trade unions, and customer associations are taken into account. Therefore, there is no specific regulatory body that will make decisions on corporate governance, which presents a challenge for international auditors.

In the context of Parmalat, which is an Italian company, discussing the corporate governance regime in the country is essential. According to Eun and Resnick (2015), the company was family-owned because of the lack of trust of many Italians in their government. The authors quoted Franco Ferrarotti, the professor of sociology at the University of Rome, who mentioned that “the government is weak, there is no sense of state, public services are bad and social services are weak. The family is so strong because it is the only institution that doesn’t let you down” (cited in Eun & Resnick, 2015, p. 9). Therefore, when shareholders do not trust independent business partners and the government, it is understandable why Parmalat’s board of directors was made up of family members (Williamson, Driver, & Kenway, 2014). Family values allowed the company to maximize shareholder wealth as well as allowed the management to commit fraudulent acts because no one could punish them.

The family-centered corporate governance system of family presents significant risks for companies that cooperate with family-owned businesses. As mentioned by Eun and Resnick (2015), William Mills from Citigroup that uses to do business with Parmalat, mentioned that his company was a victim to its partner’s fraud and would not have done business with it if they had known the truth. As a result of Parmalat’s activities, Citigroup lost 500 million euros, which is an astounding amount of money to lose because of a partner’s fraud.

Family-owned businesses face unique challenges because how corporate governance measures are taken can differ from one organization to another (Miller, 2014). While it cannot be stated that having this type of business is wrong and ineffective, the environment that persists in Italy makes it more likely for family-owned companies to divert from the internationally accepted corporate governance rules. Success factors that could have contributed to the prosperity of corporate governance in family-owned companies include the following:

A long-term strategic orientation on controlling a company’s management and shareholders rather than focusing on operational capabilities and the desire to reach short-term objectives;

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  • Aligning of the interests of managers and shareholders;
  • Focusing on core activities;
  • The establishment of commitment and continuity in business management;
  • Attracting investors and increasing the share of liquidity;
  • Aligning the interests of shareholders with the desires of stakeholders to facilitate a better decision-making process (OECD, n.d.).

It can be concluded that the corporate governance climate in Italy did not play a positive role in preventing Parmalat from cooking the books (Wakin, 2004). The prevalence of family-owned businesses and the lack of regulations to guide corporate governance procedures presented challenges that the company failed to overcome. For instance, when collaborating with non-family partners such as Citigroup, Parmalat put its interests first and committed fraud without considering the impact it will have on its stakeholders. Overall, the case showed that when there is a lack of commitment of companies to create an effective governance system regardless of family interests, their likelihood of financial fraud and other business-threatening activities may increase.


In conclusion of the case study on Parmalat, it should be mentioned that a variety of factors contributed to the failure of the company. It was able to cook the books due to the lack of accounting transparency, the inability of international organizations to notice fraudulent activities, and the general corporate governance environment pertinent to Italian companies. The issues of transparency and corporate governance were especially relevant in this case because Parmalat failed to establish fair processes and reporting. Overall, such cases as Parmalat’s should be studied in great detail because they will allow understanding the topic of financial management in greater detail.


AICPA. (2014). Forensic & valuation services practice aid. Web.

Clarke, T. (2017). International corporate governance: A comparative approach (2nd ed.). New York, NY: Routledge.

Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York, NY: McGraw-Hill Education.

ICAEW. (2018). What is corporate governance? Web.

Miller, S. P. (2014). Next-generation leadership development in family businesses: The critical roles of shared vision and family climate. Frontiers in Psychology, 5, 1335.

OECD. (n.d.). Governance challenges for family-owned businesses. Web.

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Parmalat cooked the books worldwide: Police. (2004). The Age. Web.

Quinn, J., Williams, C., Lilico, A., & Lynn, M. (2004). Parmalat: How much did the bankers know? The Telegraph. Web.

Wakin, D. J. (2004). There were earlier signs of trouble at Parmalat. The New York Times. Web.

Williamson, J., Driver, C., & Kenway, P. (2014). Beyond shareholder value. The reasons and choices for corporate governance reform. Web.

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