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Flashcards in Class 16 International Operations Deck (29)
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What case is Parmalat similar to?

Adelphia (one of the biggest European corporate frauds)


As Parmalat expanded, how did debt did the acquisitions leave the company in?

$7.3 billion in debt


What type of business is Parmalat?

- Food business
- Milk producer in Parma region


Who was involved in the Parmalat fraud?

- CEO Tanzi and members of his family


What conditions appear to have allowed the Parmalat situation to get out of control?

- Family BOD and management
- Rapid growth
- Expansion in non-core businesses
- Lack of controls
- Lack of outside scrutiny (GT and Deloitte)


What specific audit procedures could have uncovered the Parmalat fraud?

- Adequately assessing significant risk factors


In 2002, how much did Parmalat report in annual sales?

7.6 billion euros


In late 2003, what happened to Parmalat?

- Placed under administration and declared insolvent


What did the Italian "Draghi" law passed in 1998 to improve corporate governance require?

A public co. is required to change auditors every nine years


How is it that a food company (Parmalat), which operates in a stable cash-generating sector, can develop a shortage of cash?

- Series of acquisitions/expansion (Asia, Southern Africa, Australia. NA, SA, Eastern Europe)
- Borrowed money to finance


Were all of Parmalat's expansions related businesses?

- NO (e.g. soccer team Parma A.C., Formula 1 racing team)
- Reflected interests of family members


Parmalat's bankruptcy caused vast losses affecting whom?

- Multinational banks
- Investors around the world
- Tens of thousands of employees
- Auditors


How did the Parmalat CEO Calisto Tanzi and members of his family run Parmalat?

Like a family business


Describe the environment at Parmalat that allowed the Tanzi family to perpetrate such a massive fraud.

- Rapid expansion
- Unprofitable acquisitions
- Poor management
- Lack of controls


How did Tanzi and other executives at Parmalat mask the company's financial problems?

- Manipulated financial statements
- E..g established a series of overseas companies to transfer money among and conceal liabilities in order to give appearance of financial stability and liquidity


How did Parmalat manage to stay afloat during this massive fraud?

Raised funds by selling bonds


True of false.

Parmalat auditors failed to determine that 200 companies created by Parmalat did not exist.



What happened b/w Parmalat and Lehman Brothers in 2003?

- Lehman issues neg. report (casting doubt on Parmalat financials)
- Tanzi complains to Italian regulators that he is being slandered (as part of Lehman scheme to drive down share price to acquire Parmalat)


Aside from Lehman Brothers, how were other banks feeling about Parmalat in early 2003??

- Optimistic (e.g. Deutsche Bank, Citibank)
- Still buying, promoting Parmalat bonds


True or false.

Parmalat's vast network of fraudulent activity involved: creative tax planning, complicated off B/S transactions, related party transactions, illegal diversion of funds, and falsification of documents.



How was Parmalat's true financial condition uncovered?

When company fails to make a scheduled bond repayment in December 2003


What conditions appear to have allowed the Parmalat situation to get out of control?

- Incestuous board and management (Tanzi family and locals from Parma)
- Rapid growth
- Expansion in non-core businesses
- Lack of controls
- Lack of outside scrutiny by GT and Deloitte


What specific audit procedures could have uncovered the fraud earlier?

- Adequately assessing significant risk facts
- Exercise professional judgement when considering risk factors individually or in combination
- And whether there are specific controls that mitigate the risk


True or false.

A common type of fraud is the capitalization of expenses



In auditing Parmalat, Deloitte did seek confirmation of the $5 billion Bank of America account. What mistake did Deloitte make in going about it?

- Made mistake of using interoffice mail
- Where it was intercepted and favorable reply forged


In auditing Parmalat, was Deloitte able to locate "Account 999"?

- debit of $12.83 billion
- trash bin of all faked revenues, assets and profits


How did the following area of risk in Parmalat's control environment contribute to the fraud?

Audit committee participation

Not an independent audit committee


What changes could be made to improve Parmalat's control system and corporate governance to mitigate the risk of accounting and business fraud in future years?

- Whistleblower system
- Independent audit committee
- Internal audit function reporting to BOD audit committee
- Have a financial expert on audit committee
- Segregation of duties
- Good tone at the top
- Majority of independent directors
- Code of conduct


What are five insights you get from the Parable of the Sadhu case concerning the resolution of ethical dilemmas?

1) It's easy to be blinded by the light of your goal (single-minded pursuit)
2) Affects how you frame the issue/perceive the need (egoism)
3) Don’t get lost in the group
4) Beware the conflict of loyalty
5) Beware of moral relativism