CASE 8.2
PARMALAT FINANZIARIA, S.p.A.
Synopsis
Calisto Tanzi, like the George Bailey character in It’s A Wonderful Life, gave up his career
aspirations to take over the family business and become the family patriarch after his father’s
untimely death. Unlike George, however, Calisto eventually realized his ultimate dream of
Parmalat’s evolution into a global food distributor was largely the result of an aggressive
expansion program that the company pursued in the 1990s and beyond. This expansion program
was financed almost entirely by dozens of bond issues and by large bank loans. Tanzi and his
principal subordinate Fausto Tonna, Parmalat’s longtime CFO, realized that to continue to raise large
amounts of debt capital the company had to produce impressive financial statements. Sometime
around 1990, that realization prompted Tanzi and Tonna to begin window dressing Parmalat’s
financial statements.
The lynchpin of the Parmalat fraud was a so–called “double–billing scheme,” a simple ruse that
involved “double” recording certain sales transactions. This scam produced billions of dollars of
bogus receivables, sales, and profits for Parmalat. By 2003, the company’s annual financial
307
Parmalat Finanziaria, S.p.A. — Key Facts
308 Case 8.2 Parmalat Finanziaria, S.p.A.
1. Calisto Tanzi converted his father’s small business into a multinational food products distributor
over the forty-plus years that he served as the senior executive of that organization.
3. Tanzi and Fausto Tonna, Parmalat’s CFO and Tanzi’s principal subordinate, realized that for
4. For 15 years or so, Tanzi and Tonna used a “double–billing scheme” and other accounting
5. Beginning in 1975, public companies in Italy were required to be audited by an independent
6. During the long running fraud, Parmalat was audited by the Italian affiliates of Grant Thornton
2003.
7. A Grant Thornton auditor assigned to the Parmalat engagement subsequently admitted that he
had been aware of the company’s fraud; Tonna testified that Grant Thornton auditors had not only
been aware of the fraud but had also actively participated in it.
8. Italy’s auditor rotation rule forced Parmalat to replace Grant Thornton as its primary auditor in
9. Parmalat’s former Deloitte auditors insisted that they had not been aware of the fraud and that
10. A principal issue raised in several civil lawsuits stemming from the Parmalat fraud was whether
11. Several individuals involved in the Parmalat fraud were convicted or pled guilty to criminal
12. Civil settlements in this case, to date, have included a $149 million amount paid by Deloitte and
a joint $15 million payment by the global organizations of Deloitte and Grant Thornton.
Case 8.2 Parmalat Finanziaria, S.p.A. 309
Instructional Objectives
1. To introduce students to factors that complicate the audits of multinational companies.
2. To identify differences in corporate governance and governmental regulatory policies for the
financial reporting process and independent audit function across different countries.
Suggestions for Use
As a sidebar, my wife and I spent four months recently teaching in Italy. In fact, I gathered
much of the information for this case while in Italy, along with the help of two Italian professors. If
you have students who have recently visited Italy, you might ask them to share their general
impressions of the country and its citizens. Here’s one impression that my wife and I share that is
relevant to this case: Italy is a beautiful country populated with fascinating personalities who largely
Both the Parmalat and Royal Ahold cases have been referred to as “Europe’s Enron.” However,
the Parmalat fraud probably deserves that stigmatic label more so than the Royal Ahold debacle.
The Parmalat fraud received a significant amount of press around the globe, principally because of
the $5 billion of imaginary cash that the company had reported on its balance sheet. At a minimum,
this case and cases such as Royal Ahold can be used to establish that corporate fraud and audit
failures are not phenomena unique to the United States.
Suggested Solutions to Case Questions
310 Case 8.2 Parmalat Finanziaria, S.p.A.
1. Listed next are key factors that pose challenging problems on audits of multinational companies.
Each of these factors was present to some degree during the Parmalat audits.
a. Auditors will likely encounter different accounting and financial reporting treatments for
similar transactions and accounts. If consolidated financial statements are to be prepared for
the given entity, auditors must ensure that the home country’s accounting and financial
reporting standards are properly applied to the client’s consolidated financial statement data.
b. A related problem is the need to audit the conversion of transaction and account balance data
from one or more currencies to the currency of the home country.
2. The standard audit procedures for the sales and collections accounting cycle are the most
relevant to this question. Listed next are some of the principal audit procedures applied to that
accounting cycle that may have led to the discovery of the double-billing scheme.
—Determine whether monthly billing statements are routinely sent to customers.
—Scan accounting records for any evidence of duplicate recording of sales transactions or other
Case 8.2 Parmalat Finanziaria, S.p.A. 311
3. AU 316.31 presents the following definition or description of “fraud risk factors”:
“Nevertheless, the auditor may identify events or conditions that indicate incentives/pressures to
perpetrate fraud, opportunities to carry out fraud, or attitudes/rationalizations to justify a fraudulent
action. Such events or conditions are referred to as ‘fraud risk factors.’” Note: See AU 316.85 for
an extensive list of fraud risk factors.
4. Of course, “shared” audits are permissible in the United States. AU 543, “Part of Audit
Performed by Other Independent Auditors,” is the section of the professional auditing standards
most relevant to this set of circumstances. In these situations, the lead audit firm must first
determine whether it is appropriate for it to serve as the principal auditor. Key factors to be
312 Case 8.2 Parmalat Finanziaria, S.p.A.
5. This is an open-ended question whose primary intention is to stimulate students to identify the
key relevant issues related to the question and then debate those issues with their peers. Of course,
the specific answers given by students will likely vary.
Following are some general points or issues that I believe are relevant to this question:
6. This question could potentially make some students uncomfortable, particularly given the
politically correct world in which we live. You might consider pointing out to your students that to
identify cultural differences is not the same as identifying which given cultural norm or nuance is
superior in any given sense. If you are particularly concerned that this question might result in
offending some of your students, then maybe the wisest choice is to skip it.
Case 8.2 Parmalat Finanziaria, S.p.A. 313
7. The key disadvantage of mandatory auditor rotation is the learning curve effect. That is, a new
audit firm will automatically have less understanding of a client’s business practices, internal control
system, and accounting methods than the old audit firm. Several years may pass before the learning
curve deficit is overcome and then it may be time to change auditors again! Another disadvantage of
mandatory auditor rotation is higher audit costs. Empirical researchers have also commented on so-
8. Auditing researchers have identified and analyzed the differing litigation resolution strategies
that have been used in the past by major international accounting firms—of course, these strategies
evolve over time as a result of mergers, new legal precedents, overall economic issues, etc. Certain
firms have invoked a “take them to court at all costs” strategy, others have generally used a “settle as
quickly and quietly as possible” approach, while still other firms have adopted a situational
314 Case 8.2 Parmalat Finanziaria, S.p.A.
—The perceived likelihood of each possible outcome to the lawsuit (large judgment,
nominal judgment, no judgment, etc.).
—The apparent litigation strategy of the plaintiff, for example, obtaining a quick but modest