Class Activity 23

Parmalat: Europe’s Enron

Professor Ignacio Hernández Medina MCP & MID

Instructions

A. Form teams of three members, each one with a laptop.

B. Answer each of the questions that follow in a clear and justified manner.
C. At the end of the class you must upload the activity in Moodle: week 15,
Class Activity 23.
D. Team that does not deliver the activity BEFORE SUNDAY will lose the
participation points of the class.
(EACH DAY OF DELAY YOU WILL LOOSE 10% OF THE GRADE)
Please read the Case and answer the questions:

Parmalat: Europe’s Enron

This case gives an overview of the accounting manipulations that were at the
center of one of Europe’s most massive corporate scandals. Parmalat, which
started as a family-owned Italian dairy company, grew into a large multinational
with over 32,000 employees. In the 1990s, Parmalat was reporting healthy profits
that turned out to actually be created by accounting fraud rather than real
operations. The fraudulent practices included double billing of Italian supermarkets
and other retailers, “off-balance sheet financing” that involved the creation of three
phony shell companies based in the Caribbean, and the issuance of bonds backed
up by falsified assets. The schemes allowed the company to report profits every
year between 1990 and 2003, even though the company should have reported
operating losses for each of these years. The fraud was discovered when the
company’s auditor discovered that a bank account reported by the company did
not exist. Further investigations revealed the full extent of the fraud. The CEO
resigned, was arrested, and was sent to prison. The company filed for bankruptcy,
and a flood of lawsuits have been filed against the company, its former
management, and auditors. Parmalat restructured and has risen from the ashes.
They adopted International Financial Reporting Standards and hired
PricewaterhouseCoopers as their auditing firm. Parmalat is now listed on the Milan
stock exchange and is Italy’s biggest listed food company, certainly a better
outcome than Enron.
QUESTIONS

1) How much of Parmalat’s problems were due to bad accounting, and how much
were due to fraud on the part of individuals in the company?
The Parmalat situation started out fairly standard, where accounting
managers used various accounting tricks to avoid disclosing sizeable
losses. The CEO resigned, was arrested and sent to prison.

2) In the class, we discuss the differences in accounting standards in the U.S. and
the rest of the world through IFRS. Do you think it made a difference that Parmalat
used IFRS instead of U.S. GAAP?
Not many of the contrasts between the two choices are probably going to
cause significant changes in any of the organization's accounted for results.
An organization with incredible outcomes under GAAP won't look horrible
under IFRS, except if it got those outcomes with a phenomenal thing, which
is an occasion that doesn't happen consistently, for example, a consolidation
or corporate rebuilding. Also, on the grounds that uncommon things are
unveiled, somebody taking a gander at the fiscal reports would have the
option to make the changes without any problem.