Fraud and Failures in Corporate Governance - Parmalat - Case Study Example

Table of Contents 1.0.Introduction 2 2.0.Background information on the collapse 2 3.0.Communication Frailties at Parmalat 3 4.0.Theoretical models underpinning the collapse 4 5.0.Conclusion 8 Fraud and Failures in Corporate Governance---Parmalat 1.0. Introduction Strategic communication may not be considered as the fundamental basis on which organizations may succeed. Instead, there is need for the consideration of diversity of perspective and tolerance of dissent as these are the impetus of making critical decisions for a civil society. This was a case of the failure of Parmalat. This paper discusses the process of communication and risk management in reinforcing organizations management through existing infrastructure within the organization to help prevent fraud as it occurred at Parmalat in 2003. Its collapse has brought a number of questions on the completeness of communication including the reliability of the Italian corporate governance system. The assessment will be done based on the point of view of actors or components within the system and theoretical models underpinnings the same. 2.0. Background information on the collapse The economic issue of the Company can be traced years before its collapse. The management, however, convinced the then existing stakeholders that the Group was healthy and operating efficiently (Epstein & Buhovac 2014). In as much, in the month following December 2003, a number of events unfolded raising concerns that had been expressed earlier concerning the Company’s operations. For instance, the Company had a complicated organization structure that comprised of over one hundred and seventy subsidiaries (170) (Acharya et al. 2013). First, with this kind of structure it meant that leaders tasked with the responsibility of introducing agenda to other stakeholders must know how to articulate it until there will be broad acceptance of the nature of the issue otherwise it was going to be difficult to move on if stakeholders are not convinced. Secondly, there lacked transformative explanation. A transformative explanation begins by discussing the audience’s implicit theory and showing why it is plausible (Johnson et al. 2011). The consequence of the Company lacking transformative explanation led to cash flow between the parent Company and the subsidiaries. The cash flow consisted of a subsidiary in the Cayman Islands which it considered as a tax heaven; further complicating the process of monitoring the cash flow between the subsidiary and the parent company (Epstein & Buhovac 2014; Ellul 2015). 3.0. Communication Frailties at Parmalat Going by recent research on management communication in organisations, application of theory of communicative action is what Parmalat Group lacked prior to its collapse. The collapsed of Parmalat Group has not only brought a number questions on the soundness of the financial reporting standards, the soundness of the accounting standards including the reliability of the Italian corporate governance system but also theoretical models of communication in an organization and in particular, the dialogic theory of public speaking which understands public speaking as a dialogue between speaker and audience (Harford & Maxwell 2012; Acharya et al. 2013). This case illustrates old problem of shareholders who failed in their oversight role in monitoring the Company’s managers instead, exploiting the Company on what was known as continental European governance structure. The Company’s management structure failed in the identification of real challenges that was affecting it especially when it came to the ones demanding the attention of the organization. Even though the Company was listed in the stock market, financial position of the Company between 2012 and 2013 financial year indicated that there was lack of what Hamlin (2014) terms as ‘vivid language’ (p. 36) which helps listeners create strong, distinct, clear, and memorable mental images. 4.0. Theoretical models underpinning the collapse The basics of interpersonal communication dictate that employees should be transparent regarding information in the organization (Bromley & Meyer 2014). An employee who failed to heed the instructions of destroying crucial documents assisted the investigators to unveil the mystery of the Company’s activities by handing over computer and disk containing the information (Bromley & Meyer 2014). The investigation revealed that the Company had established several subsidiaries through which it had been able to channel huge financial resources to the administration of the Company who in turn failed to prove the full extent of the offshore transactions. The legal actions were extended to the bank officials who assisted the company to issue bonds and loans. The bottom line of the investigation showed that there were communication complexities that emanated from other areas such as employees and competing companies. This is what Klopf (1995) termed as the fundamentals of intercultural communication. Sometimes it becomes a challenge for Companies in the sense that what leaders encounter when making attempts to communicate an issue is that each actor will always have a strategic resource likely to affect the interaction with other actors. Conceptualizing this within the context of Parmalat Group, in its financial statements, the Company overstated assets by recording nonexistent assets, understating its debts, overstating profit while diverting Company’s money to personal family account. For the Company to hit fatalities, Parmalat had to use various wholly owned entities among which included Bonlat in the Cayman Island subsidiary---which existed during the final five years and the Bank holder of America’s false account (Franks et al. 2014). The uncollected receivables from the Company were all moved from the working corporations to the candidate objects, where their real worth was concealed. The outcome of the whole issue is what Leon Festinger termed as cognitive dissonance as an aversive motivational state occurring when people entertains two or more contradictory attitudes, values, beliefs, or behaviors simultaneously (Lam 2014). The Company management organized fictitious trades and monetary dealings to offset Company fatalities of operating subsidiaries and to expand assets and the Company income (Kolk 2008). This is a reflection that there is always dichotomy that exists between policy making and implementation and therefore if policy analysis is not done coherently there may not be an avenue to end this escape hatches. Invoice duplication and securitization arrangements founded on the false trade receivables that were recurrently used to finance the group is a clear case here. The Group modest its arrears in deceitful arrangements, recording non-existent repurchases of bonds, falsely describing non-recourse, in order to eliminate the obligations from the records. The Milan listing Stock Exchange's rules necessitate listed businesses to exemplify their corporate governance system and those who fail to follow these amended rules needed to justify why they have failed to do so. It exemplifies Gestalt theory whereby context matters, and the whole is greater than the sum of the parts. What the Company could see and how individual manager could see the whole issue mattered. The point is, in 2001 report, Parmalat Group declared that four out of thirteen directors were independent; however, they failed to disclose the relevant names of those directors giving the names in the following year (2002). There was no supervision of non-executive directors on the Company managers. The group complex structure requires a substantial amount of work and financial understanding something which was lacking in the non-executive directors. They were further reluctant to dig deep into the group activities showing that they were not prepared to have the oversight role on the company activities (Wintoki et al. 2012). To understand this problem there is need to bring the linear model or rational model. As of the model, this study considers it as one of widely-held view on how decisions should be developed by avoiding complexities associated with such developments. The linear model postulates policy development as a problem solving situation which is balanced, rational, objective and analytical unlike what the managers. The corporate failures of the Company were a clear indication of lack of consideration on this model. It was failure on oversight authority as the non-executive directors. Product tampering, financial fraud and other violation of governance laws can also be considered as economic crime. Wintoki et al. (2012) argue that the possibility of the occurrence of such crimes usually depends on two main factors. First, the cost associated with committing the said crime and secondly the benefits which are derived from committing the fraud (Erkens et al. 2012). The cost associated with committing a governance fraud typically depends on three major factors. The first one is the chances that the individual with deviant behavior will be discovered, which substantially depends upon the monitoring mechanism which has been put in place by the board of directors (Jones 2014). In the case of Parmalat scandal, the auditor general recommended the use of proper monitoring mechanism to be put in place and such scandals would have been reduced from happening from time to time since the greater the probability that the fraud could be discovered the less likely it would have been that the company management would commit the fraud (Wintoki & Netter 2012). What was not done however was adopting change. This complexity is indeed related to the theory of change approach as postulated by Laverack (2007). The theory requires that during policy analysis process, stakeholders and policy makers be succinct concerning final outcome of the policy as well as the impact such policy will have on the normal operations of organisations. When policy makers follow the theory they will be able to focus the already scarce evaluation resources on how and what to measure concerning these key elements. Again, the dominant recurring theme is that risk organization is an integral part of the process of corporate governance. In the context of private sector, the primary responsibility of all the factors rests with the board of directors. Webster (2012) in his study concluded that information communication in the management of risk is the pillar of corporate governance; it is capable of achieving better and more efficient use of the organization resources and help in better management of projects. The arguments that are underlying the need for formal risk management control system may, therefore, appear to have strong similarities across both public and private institution (Franks et al. 2014). Effective communication process will mean bringing what has been done in the previous processes of the management to consultation and decision making. It has to be noted that in as much as there can be streamlined processes of communication in a firm the credibility of the information communicated is still an important aspect that the maker must convince the cabinet or the board about. 5.0. Conclusion The Parmalat scandal is one of the largest known accounting frauds and it was thought to be a model of corporate governance. The group had one of the most reputable independent board and audit committee members. The Company was also listed in the stock exchange and some of its clientele included Fortune 500 companies. The company had won several awards and were respected Private Corporation, which was later listed to the public. The fraud in this cases and the disclosure of Parmalat scandal was complicated by the fact that top management organs tended to follow the opinion given by Howard Gardneris regarding the theory of multiple intelligences in which he proposed that different people are intelligent in different domains but in this case such actions were against the mission of the Company (Epstein & Buhovac 2014). Ellul (2015) states that risk management in business offers basis for building integrated management system. Through this, it helps in generating well-organized risk management policies within the organization. The process of risk management reinforces organizations management through existing infrastructure within the organization. References Acharya, V, Gottschalg, O, Hahn, M, & Kehoe, C 2013 Corporate governance and valuecreation: Evidence from private equity. Review of Financial Studies. Vol. 26 no.2, pp. 368-402. Bauld, Linda and Judge, Ken, (2008). 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