Corporate Governance Failure and Risk Management - Parmalat Scandal - Case Study Example

Student's Name Professor's Name Institution Course Date Parmalat Scandal: Corporate Governance Failure and Risk Management Executive summary Parmalat is an international dairy and Food Company and the famous producer of milk in the process of ultra-high-temperature to increase the shelf-life. The firm collapsed in 2003 due to bankruptcy resulting from poor corporate governance. There is the knowledge that the management purpose is to decide affairs of the company to ensure meeting of the set objectives. The corporate board is responsible for overseeing and providing a breakthrough in all circumstances of the organization. The Executive influences the authority and control risk practices. Also, the enterprise unit and other departments are the sites where risks occur and affect the shareholder's assets. After discovering the financial losses, Parmalat did not solve the problem but rather engage in collusion and fraud where unethical means were used by the executives to increase their scam. To increase revenue, they created fake business deals through duplication of the bills. From fraudulent transactions, they borrowed cash from institutions. They made fake resources hence increasing the property reported. Also, they took legal loans which they later hid from shareholders. The executives used the bankers to involve in financial activities that changed their balance sheet debt or concealed the balance as equity on the sheet. Finally, they engaged external auditors and managers to sponsor the fraud before exposure. The case study showed the lack of competency in the Parmalat corporate which required solving as soon as possible through risk management to avoid future inconveniences. With such breakdown, a better system that would ensure effective approaches that provide the quality performance of the board, executives and other shareholder need implementation. Introduction No company begins to operate with the accuracy of expecting everything to go smoothly. There is an anticipation that through some uncertainties the firm may at some point face challenges. Events of unpredictable sources exist in two forms whereby the actual cause is an opportunity whiles us the negative source is a risk. Risk can occur in many ways such as threats from mission failures, improbability in marketing finances, accidents, disasters, theft, and legal liabilities. All these risks can hinder a business from achieving its objectives. Hence, without hesitation companies come up with ways to control these issues before they occur (Soltani & Bahram, pp.252-274). Some companies fail to take the initiative thinking such problems will not come to pass, and when they happen, the industry faces tremendous losses. This paper seeks to show the failures of Parmalat governance and possible risk management solutions. Risk management is identifying, assessing, and prioritizing of unknown events which could impact negatively on set the goals of a company hence require a coordinated resource application to reduce, screen, and control the effects and maximize opportunities realization. Ways to mitigate the threats are several, and they are avoidance of risks, reduction of problems, transferring some risks to another group or converting the threat into an opportunity the using it for-profit maximization (Andersen et al. n.d). In the case of Parmalat Farm Company where poor risk management led to bankruptcy and fraud, strategies need developing to excel performance output. A case study is, therefore, an essential approach to outline the failures of corporate governance which will be used to show the need for proper risk management program. Case Study Parmalat situation arose a need for further investigation to find out what led to such a disappointment. Parmalat was the largest food firm in Italy in its time. The primary business was dairy output but later expanded in television, football and tourism businesses (Buchanan, Bonnie, and Tina Yang, pp.27-52). The milk produced was unique since it had a long storage life that led to increased income and 36,000 workers in 139 firms. Unfortunately, it went insolvent in December 2003. It claimed cash that did not exist and the money from the investors disappeared making it the first largest bankrupt company in Europe. The resultant case had a significant effect on Italian country that represented 1.5% of Global National Product (Storelli & Claudio, p.765). The corporate began in 1961 where Calisto Tanzi focused his business in dairy output. He further decided to extend the business in 1980 by purchasing television which got sold in 1989 due to poor performance accounting for a loss of €45 million. The company made acquisition campaigns globally in 1990 where it had become diverse in football by purchasing many football teams which included Palmerias, Audax Italiano, and Parma Alcio. Also, Tanzi engaged in tourism activities resulting in a loss of €2 billion. More campaigns continued and by 2002 the owner of Parmalat company, Parmalat Finanziaria, had 200 firms all over 50 countries that issuing of bonds occurred regularly to finance them. Cash assets recorded massive amounts of money in the books in the same year. In December 2003 Parmalat no longer refunded the expiring bonds worth €150 million resulting to downgrading the bonds status to junk. In the same year, American bank refused to agree to any deposition of €4 billion cash by Parmalat saying it forged the account (Ramaswamy & Vinita, p.68). Forgery of the bank documents by Tonna got found. During finalization of the month, Tanzi got imprisoned after Parmalat bankruptcy declaration. Tanzi founded the company at the age of 22 years after dropping out of college. He was the chief executive officer from the beginning to the end of the business when it collapsed. Tanzi was the principal figure that dominated all exercises by having almost total control over the firm. He put his relatives anywhere he wanted to oversee those in power. His roles were both as a chair and executive. The roles were joint making it an issue of corporate governance. The board and the top managers had many related assets and organization, outside firms, responsibility, and therefore a conflict of interest came up that involved the holder of the other companies. The board members included 13 people of which 5 were non-official directors who are an awkward scenario in that it had more executive managers than the nonexecutives. Tanzi was the board chairperson, and the other members included his brother, son and niece (Marnet & Oliver, pp.191-210). His counsel also had Fausto Tonna who was a fraud and three other managers all recruited by Tanzi. The independent directors constituted of Tanzi's attorney and two of Tanzi's best friend. The executive group composed of seven managers, three of whom were in his family. The committee involved in internal affairs consisting of three people of which were not the outside directors. Stefano, Tanzi's son, was the principal of the football team, his daughter Francesca ran Parmatours, tourism business owned by the family. Lack of transparency comes to be due to the management structure of the board, committee, and the top managers whereby the stakeholders were not honest with each other. Many crucial issues that included compensation and stock ownership failed to undergo discussion. The board did not set and expose the guidelines for performance evaluation, retirement age, and end of the term. After nine years’ time, the Italian law suggests change of the external auditor. Deloitte replaced Grant Thornton after nine years. The new account continues to show the company off increasing debt, losses, and idle assets. Pedro, the accountant in Deloitte, was curious about accounting and asked the top managers many questions (Melis &Andrea, pp.478-488). In return, Tonna became angry and complained to the primary contact called Mamoli. Afterwards, Mamoli requested Pedro to talk to him before initiating discussions with Parmalat. The largest Parmalat stakeholder who owned 51% of its equity made the Parmalat pyramid structure complicated. The more complicated it was, the more chances it provides for engagement in fraud and other transactions without discovery. Due to these reasons, Parmalat corporate governance among the 69 companies of Italy rated the worst. Losses experienced by Parmalat Company together with exaggerated assets got coaxed and diverted the money to Tanzi family members. To hide losses the company used other entities especially Bonlat for five years and the American bank as well where it hid wrong account. Transferring of assets took place from the company to the entities where the real value was. False trade and cash moving organizations aimed at offsetting losses of the small businesses and increasing income and assets. Use of unauthorized security was the scheme used to duplicate invoices and carry out deceptive marketing used to cash in the group. Parmalat minimized debt by use of various fake schemes such as recording of bonds repurchases that were not in existence. It sold shares that were not purchasable to remove losses from the record. The company failed to record debt or changed the account. Debts later amounted to €14 billion eight times the total they had before. Though it was unclear what information was available the shareholders when the debt increased, a clear explanation should show the occurrence of the scenario. The external investor was to report the losses or gains made on the contract as the law suggests before transformation liabilities into the equity. To keep cash, Parmalat used acquisition strategies and other businesses to issue bonds. Parmalat received a downgrade on November 2000 which rated BBB-grade. B 2002 the company had a record of €3.3 billion of cash; it gave out bonds of €150 million in October and €200 in December. A concern came when many banking industries wondered why the company was issuing money to smaller market ye it had the greater debt to cover hence raising the curiosity where the cash originated. Conclusion and Recommendation Based on the past outcome Parmalat had inefficient risk management procedures that resulted in bankruptcy, fraud and corruption and finally closure. Through past experiences, it is essential to focus what the future may bring and therefore coming up with strategies to prevent the fatality. Understanding, assessing and controlling risks is the capability to potential impacts in coming days (Drew, pp.127-138). Mitigation of risks at its starting point engulfs further spread of inconveniences. Parmalat scandal resulted from weak corporate governance that failed to exercise regulations necessary hence caused the collapse. The weakness of the management structure was to a greater degree connected to the repercussion that Parmalat faced including the poor performance. Corporate governance is the measure of performance of the financial, accountability and operational management (Solomon & Jill, n.d). Even though there was no readily available information concerning rewarding of executives it so is the reason why the corporate was failing. Securing of finances was also a challenge and thus the investors ended suffering greatly. The Parmalat auditors were aware of the losses occurring yet did nothing to prevent it and further added salt to the injury. Catering for the corporate issues faced by Parmalat due to negligence, initiatives take place to develop the process of the business system, to enhance the discipline and hinder future failures in the company. Therefore, use of appropriate risk management tools and practices are necessary for industries to take hold of opportunities and gain the advantage over other competitive enterprises that do not have better ways to implement them. The strategies involved are as follows: Increasing supervision and accountability Independent auditors should be many on the board to ensure their roles continue in firmness. Parmalat auditors did not carry out their role in providing the governance internal control and resource reporting were adequate and efficient hence the failure. Enhancing accountability through the use of rules and regulations that are relevant should be the most crucial part of the implementation of the quality governance process. Therefore, the board should ensure that compliance with the management reinforcement Balancing of executive and non-executive management Independence of the board is a vital factor that enhances the efficiency of corporate governance in a firm. Increasing the non-executive managers to ensure that they are in the balance with the executives is crucial. Avoiding domination in the board during decision-making processes is essential, for accountability sustenance. The role of CEO and the chairperson should be separated and performed by different people such that there is no domination of the same individuals in all the areas of the organization. By so doing, the control environment is high and so are the auditors, regulators, and reviewers (Kirkpatrick & Grant, pp.61-87). It is important for it enables all the members to participate and be transparent in their duties. An audit committee formation will help fulfill financial responsibilities and reporting to the board for evaluation purposes. Ethical code Application of the moral values is essential in powering the governance procedures, and companies that use the system performs greatly. The system tool is a powerful weapon that strengthens the corporation through highlighting responsibilities of the corporate towards staff members and the stakeholders. Again, it ensures compliance with guidelines provided when performing their authority when inside or outside the industry. Members of the organization show accountability to their duties and aim at sustainability as well as respect the parameter by providing the required information for improvement of the governance hence growth and development of the firm. Also, the code provides understanding to the guidelines of decision-making process where all stakeholders comprehend the importance of the tool. It represents the constitution of the company providing clarity of duties of every member of the firm so that they all perform productively. Maintenance of corporate governance through legislation and regulation In the case of a weak or non-responsive system, a mechanism is used to remove it. The regulators exercise their task by ensuring that the violators are active in their duties and if not the removal of such individuals lawfully take place. The laws are the ones that regulate companies when managed appropriately and ethically as well as those involved in governing. Had Parmalat adhered to the regulation of corporate governance failure avoidance could result. Since it did not comply with the rules, neither explained the consequences it collapsed. Compliance with the enforced rules of the organization as well as practices and regulations is, therefore, significance to ensure that all members, as well as the firm, meet the objectives. Works Cited Andersen, Torben Juul, and Peter Winther Schrøder. Strategic risk management practice: how to deal effectively with major corporate exposures. Cambridge University Press, 2010. Buchanan, Bonnie, and Tina Yang. "The benefits and costs of controlling shareholders: the rise and fall of Parmalat." Research in International Business and Finance 19.1 (2005): 27-52. Drew, Stephen A., Patricia C. Kelley, and Terry Kendrick. "CLASS: Five elements of corporate governance to manage strategic risk." Business Horizons 49.2 (2006): 127-138. Kirkpatrick, Grant. "The corporate governance lessons from the financial crisis." OECD Journal: Financial Market Trends 2009.1 (2009): 61-87. Marnet, Oliver. "History repeats itself: The failure of rational choice models in corporate governance." Critical Perspectives on Accounting 18.2 (2007): 191-210. Melis, Andrea. "Corporate Governance Failures: to what extent is Parmalat a mainly Italian Case?." Corporate Governance: An International Review13.4 (2005): 478-488. Ramaswamy, Vinita. "Corporate governance and the forensic accountant." The CPA Journal 75.3 (2005): 68. Soltani, Bahram. "The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals." Journal of Business Ethics 120.2 (2014): 251-274. Solomon, Jill. Corporate governance and accountability. John Wiley & Sons, 2007. Storelli, Claudio. "Corporate Governance Failures-Is Parmalat Europe's Enron." Colum. Bus. L. Rev. (2005): 765. Read More