After eluding financial analysts and investors for a long time, Parmalat went bankrupt later in December, 2003 and many of their board of directors have been arrested since then. Here is a brief summary of the events: In the late 1980’s, Parmalat’s financial situation was poor due to investment in side businesses. i.e. TV network, Parmatur, football teams (Palmeiras, Parma, etc). Cash siphoning through these companies was estimated to be total of € 10 Bn. In 1990, Parmalat went public which enabled them to tap into the capital markets.
Early 1990’s, the company began to acquire dairy producers around the world in order to try to hide the growing debt.
Parmalat entered into a series of bond issuances and securitization of receivables to generate cash. A series of other fraudulent accounting practices occurred during the following years. In December 2003, Parmalat was not able to make a U$ 150MM bond payment and raised the attention of the entire market. When the fraud was brought up, Calisto Tanzi (Parmalat founder) and Fausto Tonna (CFO) was arrested along with another 10 individuals.
Grant Thornton and Deloitte & Touché were Parmalat’s accounting firms during the last 2 decades. Partners of both firms were charged for fraudulent activity.
Case analysis From the analysis we made, there are several items that can be appointed as accounting principle violation: A) Overstatement of Assets Assets Selling: Parmalat sold firms to private entities and individuals to re-buy it later in a fake operation, as the money came from other offshore entities just to create liquidity in the books; thanks to that, they could keep issuing bonds to cover their debts Accountable Receivables recognition: Double billing the Italian supermarkets and other retail customers Fake bank accounts: false document have been created to prove the existence of € 3,9 Bn cash at Bank of America. Again, with more liquidity, more easily got the loans
B) Overstatement of revenues Revenue Recognition: False income sales through its offshore companies
C) Understatement of liabilities Debt eliminating: Parmalat reduced approximately Euro 3.3 Bn of debt. Misclassification of liabilities: describing sales of receivables as non-recourse, when the company maintained obligation to ensure payment.
Proper accounting practices that should have been used A) Assets The firm recognizes revenue when the transaction meets both of the following conditions: 1. Completion of the earnings process: the seller has done all (or nearly all) that is promised to do for the customer. That is, the seller has delivered all (or nearly all) of the goods and services it has agreed to provide 2. Receipt of assets from the customer: The seller has received cash or some other asset that it can convert to cash, for example, by collecting an account receivable Accountable receivables recognition (billing twice)
In this case, Parmalat generated double accounts receivable for the same operation billing both, their distributors and the final customer. The revenue from the final customers was recognized on the books, but the billing for the distributors were considered as transfer and accounted for credit owed. Revenue recognition What happened here is that the seller never done what was written in the books, as the operation never existed and customer never received the goods.
Debt Eliminating Parmalat eliminated paid down debt by a series of capital market transactions, mainly bond issuances and sale of receivables. These financing transactions were made possible by overstating their assets. Misclassification of liabilities Parmalat misclassified the financing transaction of selling their receivables. Although, Parmalat sold its receivables (assets) to financial institutions/investors, they were not a true non-recourse sale and Parmalat maintained obligation to ensure that the receivables were ultimately paid, therefore Parmalat should have classified this financing as a liability.