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HOW PARMALAT WENT STALE:

in light of the role played by the company's gatekeepers,
to what extent are the causes of Parmalat's debacle
identifiable with a failure of Italys legal system?

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1.INTRODUCTION
Parmalat Spas bankruptcy case has been referred to by the US Securities & Exchange
Commission (SEC) as one of largest and most brazen corporate financial frauds in
history1, while scholars analyze it as the ultimate epitome of the flaw underlying European
governance structures, Italys in particular ie. concentrated shareholding exploiting the
company rather than monitoring its managers.
The Parmalat group was constructed as an archipelagos of companies whereby voting
rights were prevalently controlled by the Tanzi family: 67 other companies were held under
direct control alone by Parmalat Spa, itself controlled by Parmalat Finanziaria with 89% of
its voting share capital; 10% was owned by Dalmata Srl, an unlisted company entirely
controlled by Parmalat Finanziaria (diagram 1, page 5).
With hindsight, such a concentrated control structure in a financial colossus like Parmalat,
raises two considerations. The first is an intrinsic one, and it is treated in detail by Prof J
Coffee: Parmalat is in fact an example of embezzlement of investors and creditors by a
family that treated corporate assets as their own - a textbook case-study for a transatlantic
comparison with Enron and Wordcom. In the latter cases, managers engaged in accounting
irregularities to inflate the stock price and gain from their equity and options holdings2; in
Parmalat, on the other hand, Tanzi expropriated the company resources via self-dealing. As
Coffee concludes, these idiosyncrasies inevitably beckon national legislators to adopt
diverging regulatory solutions3.

Securities and Exchange Commission v. Parmalat Finanziaria S.p.A., Case No. 03 CV 10266
(PKC) (S.D.N.Y.), Accounting and Auditing Enforcement Release No. 1936 / December 30, 2003.
2
L Enriques & P Volpin, Corporate Governance Reforms in Continental Europe, Journal of
Economic Perspectives, Vol.21, No.1, Winter 2007, Pag.125.
3
JC Coffee Jr, A Theory of Corporate Scandals: Why the U.S. and Europe Differ, The Center for
Law and Economic Studies, Columbia Law School, March 2005, Working Paper No. 274, p.18: As
a result, governance protections that work in one system may fail in the other. Even more
importantly, different gatekeepers need to be designed into different governance systems to monitor
for different abuses.

Candidate N: QLWM8

The second consideration is induced by the magnitude of capital that Parmalat was able to
borrow despite its far from immaculate governance. The answer is easily found in the
favourable credit ratings it enjoyed (diagram 2, page 6): rather than denoting an
inefficiency on behalf of the market, it would be more accurate to point at their reliance on
gatekeepers. Once again, Coffees comment on Enron, equally applies here: Parmalat is the
Italian illustration of the corporate governance deficiencies of undeterred gatekeepers4.
Arguably, while stricter public regulation may not have prevented Parmalats denouement,
more effective regulation would have made it less easy to attain 5. Italian substantive rules
cannot be blamed on the contrary, they even more exigent than their American
homologues. It is in fact public enforcement that failed to perform its task: this is clear
when one considers how CONSOB6 began investigating only after the markets signals, in
December 2002, that something was wrong at Parmalat. However, ignoring this rationale,
the reaction both at Italian and European level is propelled towards tougher enforcement of
public regulation.

The thesis of this paper is that investigations on the causes of Parmalats default should not
be confined to an assessment of the rigidity of national legislation. It should rather extend
to the deeply flawed corporate governance regime as a whole.
This conclusion is evinced in four steps. Following a chronological account of the
companys decline into bankruptcy (section 2), Parmalats control structure will be
analyzed (section 3) to discern whether its managers recurred to accounting subterfuges or
whether the financial misreporting was due to false accounting. Should the former case be
JC Coffee Jr, Understanding Enron: Its the Gatekeepers, Stupid!, 57 Business Law, 1403
(2002).
5
F Benedetto & S Di Castri , There is Something about Parmalat (On Directors and
Gatekeepers), November 2005. Available at SSRN: http://ssrn.com/abstract=896940 - p.9.
6
Commissione Nazionale per le Societa e la Borsa the public authority responsible for regulating
and controlling the Italian securities markets.
4

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proved, this would imply the existence of gaps in national legislation and thus disprove
the theory supported in this paper.
As a logical consequence of the first step, the second involves the companys gatekeepers
which, it is here submitted, are all characterized by a lack of independence from the blockshareholders. Section 4 therefore analyses all the gatekeepers involved, both internal as
well as external.
Thirdly, Section 5 highlights the inability of rating agencies to unveil Parmalats financial
vulnerability.
Finally, to prove the above-mentioned thesis, it will be enquired whether Italian legislation
may actually facilitate such corporate scandals in the form of audit failures. The question
shall be tackled by appraising the enforcement of the following requirements: liability of
the primary supervisor, independence, liability rules and private enforcement.

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DIAGRAM 1: a simplified version of Parmalats group structure.

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DIAGRAM 2: Financial analysts recommendations for Parmalat (source: Melis,see footnote 23).

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2. PARMALATS EPILOGUE.
Between the late 1990s and 2002, under the lead of its CFO Fausto Tonna, Parmalat was
set to fulfill its ambition of becoming the Coca-cola of milk7. Between 1993 and its
demise, in fact, the company made over 70 acquisitions and visited the international bond
market 40 times (diagram 3, page 9). Such colossal expansion conceals a twofold agenda:
firstly, to turn the company into a multinational powerhouse and, secondly, to make the
assessment of its real earnings more complex8.
The first symptoms of the eminent decline were perceived in February 2003 when the
company decided to issue bonds, a fresh increase in corporate debt, with a value of 500
million. The markets negative reaction to this unexpected announcement prompted
Parmalat's founder and CEO (Calisto Tanzi) to immediately retract the bonds and dethrone
Tonna from his charge.
Such drastic attempts to restore equanimity revealed to be an efficient, albeit momentary,
palliative for the market and shareholders; however this was not the case for Alberto
Ferraris, the new CFO. Alarmed by the companys excessive payment to service its debts
(interests were far higher than certified by the alleged 5.4 billion in debt), as well as by
being denied access to corporate accounts, Ferraris mounted a sub rosa investigation which
brought to slight a total debt of 14 billion, more than double that on the balance sheet9.
In the meantime, the 2002 consolidated budget was approved on March 28th with optimistic
financial forecasts (backed by the availability of liquid assets in an American bank
account), thus boosting stock value to 1,97. No contrasting statement was put forward by
neither auditors nor by the supervisory board. Only four months later, however, Parmalats

Times magazine, How it All went Sour: www.time.com/time/magazine/article/0,9171,7853181,00.

8
B Buchannan & T Yang, The benefits and costs of controlling shareholders: the rise and fall of
Parmalat Research in Internation Business and Finance, Vol.9, N.1, March 2005, p.35.
9
Ibid.
7

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management announced a private bond issue of 300 million: still a significant number of
analysts (including Standard & Poors) confirmed their BUY for Parmalats shares.
CONSOB, on the other hand, in virtue of the pre-existing pressure exerted from the Cirio
case10, formally invited Tanzis group to provide more detailed information about its cashflow. Two months following CONSOBs request (and only a few weeks after Ferraris
resignation), on December 19th 2003, the largest corporate scam in European history began
to unfold when the companys senior management admitted that the alleged Bank of
America 4 billion account, was in fact inexistent11. On the same day, CONSOB forwarded
to Milans
Attorney Office two reports with criminal implications, alleging false statement in the
accounts, false company communications strategy, agiotage, fraud and impeding the
vigilance functions12.

Cirio is another Italian food company declared fraudulently bankrupt by the Public Prosecutors
office only a few months before Parmalat.
11
www.ft.com/indepth/parmalat
12
www.consob.it/documenti/Pubblicazioni/Relazione_annuale/att2004.pdf
10

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DIAGRAM 3 (source: Buchannan & Young, footnote 8).

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3. PARMALATS CONTROL STRUCTURE.

The European system, Italy in particular, has long been characterized by the ubiquity of
pyramidal groups defined as structures where legally independent firms are controlled
by the same entrepreneur through a chain of ownership relations13. The definition applies
to the corporate structure that emerged during the magistrates investigations in the
businesses of the Tanzi family.
Parmalat Finanziaria began as a MIB3014 in 1994 until 1999 and from January 2003 until
its bankruptcy. Despite ownership disclosure rules for quotes companies15, the actual
configuration of Parmalat Finanziaria is predominantly unaccountable and not easy to
trace.
Given that the group is comprised by more than 200 subsidiaries across 52 countries
worldwide16, Diagram 3 is only an attempt to illustrate the principal internal connections,
yet it is sufficient to appreciate how the Tanzi family, controller of the holding company
Coloniale Spa, was de facto the controlling shareholder of the group in its entirety. In fact,
as the below pie chart illustrates (diagram 4, p.14), Coloniale Spa detained the majority of
the groups voting-share capital (directly owning 49.16% of the shares, as well as 0.86%
through Luxembourg-based Newport SA), followed by two institutional investors.

M Bianco & P Casavola, Italian Corporate Governance: effects on financial structure and firm
performance, European Economic Review, 1999, 43, p.1059.
14
Italian listed companies capitalising EUR.800 million and above. The index was administered by
Standard & Poor's from its inception until June 2009, when this responsibility was passed to FTSE
Group, which is 50% owned by Borsa Italiana's parent company London Stock Exchange Group.
15
As demonstrated by Francesca Palisi in Assessing the Impact of the 2006 Financial Law
Reform (available online at www.borsaitaliana.it/varie/studenti), ownership disclosure rules have
become particularly stringent with the implementation of the 2006 Reform. Nonetheless, even prior
to the recent reform (in other words during the period when Parmalat began sliding down a
financial slippery slope, in the words of Palisi), disclosure rules have always been far from lax
(especially compared to other European legal systems). As it is submitted in this paper, however,
the problem does not lie with the legislation but rather with its enforcement.
16
N Ficarella & M Gavridis, Enron & Parmalat: two twins parables, January 7 th 2004. Available
at: http://ssrn.com/abstract=886921.
13

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As proposed by Shleifer & Vishny, large investors have the incentive to monitor the
management to the extent that they may launch takeovers or invite third parties in doing
so17. This is reflected among Italian listed companies: Bianchi, in fact, refers to blockholders as shareholders willing and able to carefully monitor senior management 18.
Nonetheless, while the agency problem is thus abated between senior management and
controlling shareholders, the new central agency problem in such firms is () rather the
often legal expropriation of minorities () by controlling shareholders19. Parmalat was
no exception: Tanzi admitted pouring approximately EUR.500 million from Parmalat to
other family-owned companies (Parmatour in particular, even though it was not even a
subsidiary of Parmalat but an unlisted company owned by Nuova Holding, a Tanzi family
investment company)20. Yet, despite the protagonist role he played, Tanzis conduct should
not be considered in isolation when assessing the causes of the companys financial
collapse.

How does this apply in relation to the companys mendacious financial position? As
premised in the introduction to this paper, it is necessary to assess whether Tonna and
Parmalats senior management resorted to accounting tricks to avert disclosing relevant
losses or, alternatively, whether the financial misreporting was simply due to false
accounting. Should the first scenario be proved, it would follow that Parmalats
management exploited gaps in generally accepted accounting standards thus legitimizing
A Shleifer & RW Vishny, Large Shareholders and Corporate Control, The Journal of Political
Economy, Vol. 94, No. 3, Part 1. (Jun., 1986), p.462.
18
M Bianchi, M Bianco, L Enriques, Ownership, Pyramidal Groups and Separation between
Ownership and Control in Italy, in: European Corporate Governance Network, the Separation of
Ownership and Control: A Survey of Seven European Countries (Preliminary Report to the
European Commission), 1997, Brussells: ECGN.
19
R La Porta, F Lopez-de-Sinales, A Shleifer, R Vishny, Investor Protection and Corporate
Valuation, The Journal of Finance, Vol.LVII, No.3, June 2002, pp.1148.
20
From Times special report How it all went so sour. Prosecutors believe Tanzi has funnelled
over EUR.1.500 million to Parmatour and some other million to other Tanzi family owned
companies. www.time.com/time/magazine/article/0,9171,785318-12,00.
17

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the claims of academics identifying the causes of Parmalats debacle with lax national
regulations21.
McBarnet on creative accounting: even assuming that Parmalat adhered to accepted
accounting standards, such assumption cannot logically rule out that different accounting
treatments may have been conducted for the same facts implying that, whilst all formally
adhering to objective and recognized standards, reports may indicate different results22.
As Melis concludes, it is essentially the spirit of the assessment that characterizes the
choice between different alternatives23. The significance of this conclusion for Parmalat, in
view of the control structured outlined above, is clear: in fact, if not pursuing what has been
referred to as the true & fair view, then financial statements inevitably portray the
company in a light favorable to principal stakeholders but not necessarily to the minority.
In order to set the context, it is useful to briefly compare Parmalat with the circumstances
involving Enron and Arthur Andersen, where one of the causes was identified in the
introduction of accounting principles designed for specific transaction.
Firstly, Weil illustrates how the rigidity of these standards leads to what he describes as the
show me where it says I cant response, whereby aggressive managers can say: detailed
accounting rules cover so many transactions and none of them covers the current issue, so
we can devise accounting of our own choosing24. In addition to this, Palepu & Healy
explain that the reason for a shift towards principle as opposed to transaction-based

Academics holding this view: M Onado, Unautentica truffa allitaliana, 10/3/2004, available at
www.eurozine.com; Buchannan & Yang (footnote 8), p.27.
22
D McBarnet, After Enron: Corporate Governance, creative Compliance and the Uses of
Coroporate Social Responsibility in J OBrien (ed.), Governing the Coroporation: regulation &
corporate governance in an age of scandal and global markets, London, 2005, p.215-220.
23
A Melis, Financial Reporting, Corporate Governance and Parmalat: was it a financial reporting
failure?, in J OBrien (ed.), Governing the Coroporation: regulation & corporate governance in
an age of scandal and global markets, London, 2005, p.237.
24
R Weil, Fundamental Causes of the Accounting Debacle at Enron: Show me where it says I
cant!. Summary of testimony presentation, February 6th 2002, The Committee of Energy &
Commerce, p.3.
21

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accounting principles on behalf of the FASB in 200225, is to be found in the incentive that
pre-Enron inflexibility provided to creative accounting aimed at circumventing these
rules26.
The contingencies and implications of the American system find no reflection in the
prelude to Parmalats collapse - the company in fact endorsed explicitly principle-based
accounting standards such as CNDC-CNRC 2002, on a national level, as well as IASB
2003. If on the one hand one could refer to a wealth of academic articles demonstrating
how Enrons managers both exploited the fallacies inherent in the national accounting
standards in favor of financial engineering as well as producing financial statements
incongruent with US GAAP27 - on the other hand, Parmalats record of compliance to
accepted accounting standards, is immaculate28.

Hence, unlike Enron, Parmalats bankruptcy causes are to be identified with falsification of
accounts on behalf of the senior management in order to manage earnings, assets and
liabilities it did not, therefore, involve any complex accounting techniques. This
conclusion, coupled with recent disclosures by Fausto Tonna (Parmalats CFO) revealing
that the company had undergone systematic falsification for the past 15 years 29, beckon
the question of how could such consistent and solid practice have persisted and, above all,
what were the monitors doing in the meantime?

25

Financial Accounting Standards Board, 2002.

See K Palepu & P Healy, The Fall of Enron, Journal of Economic Perspectives, 2003, 17/2.
27
Palepu & Healy (footnote 26); A Catanach & S Rhoades, Enron: a Financial Reporting Failure?
Villanova Law Review, 48/4, p.1062-1072; JC Coffee Jr, What Caused Enron in P Kornelius & B
Kogut (eds.), Corporate Governance & Capital Flows in a Global Economy, 2003, Oxford, ch.2
(passim).
28
Benedetto & di Castri (footnote 5), p.10.
29
www.ft.com/indepth/parmalat.
26

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DIAGRAM 4 (source: www.borsaitaliana.it/varie/studenti/eng).

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4. QUIS CUSTODIET IPSOS CUSTODES?30

As already premised in the introduction, Coffees depiction of Enrons collapse as a clear
case of gatekeeper failure equally applies to Parmalats bankruptcy31.
With the term gatekeeper (first coined by Gilson & Kraakman 32) external professionals
who serve the board or investors, Coffee alludes to two characteristics: gatekeepers are
persons detaining reputational capital (gained over many years and many clients) to assure
the veracity of statements that it offers or monitors33; secondly, gatekeepers receive a lower
benefit for their role as information monitors than does the principal from the transaction
that gatekeepers enable in virtue of this, the gatekeeper is easier to deter34.
Gatekeepers perform a monitoring function on the companys business: the principal
addressee is the market that relies on the accounting information to assess the companys
financial situation. Gatekeepers are therefore essential for financial markets as a whole;
however, to fulfill such responsibility in the first place, a significant level of independence
must be ensured between the gatekeepers and the companys management. This section
assesses whether this assumption has been conformed to in the Parmalat debacle.

The task of monitoring Italian listed companies is delegated to two reputational

gatekeepers: the board of statutory auditors and the external auditing firm. While the
former is a national idiosincracy, the latter is a globally recognized form of monitoring.

Who shall guard the guards themselves? (Juvenal, Satire 6.346348)

Coffee (footnote 3), p.14.
32
R Gilson & R Kraakman, The Mechanisms of Market Efficiency, 70 Virginia Law Review 549,
p.612-621, (1984).
33
JC Coffee Jr, Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms,
UC Berkeley Program in Law and Economics, p.10: www.escholarship.org/uc/item/13d8s2qs.
34
Ibid.
30
31

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BOARD OF STATUTORY AUDITORS

Former Italian law35 required listed and unlisted companies to nominate the board (know as
the Collegio Sindacale) in order to perform as the main auditor within the company.
Art.149 of the 1998 Draghi reform36 provides that the boards function is to scrutinize -

A) the compliance of acts and decisions of the board of directors with the law and the
observance of principles of correct administration;

B) the adequacy of internal control system and accounting systems as well as the reliability
of the latter in representing any transactions undertaken by the company;

C) the adequacy of the instructions handed down by the holding to its subsidiaries,
concerning the provisions on the information necessary to conform with the law.

Art.148 additionally requires corporate by-laws to provide: number of auditors (minimum

of three), of alternates (minimum of two) as well as the procedures to appoint the chairman
of the board. In addition to this, corporate by-laws ensure that one (or two, should the board

35

Since 2004 the new company law allows to choose between a unitary board structure (with an
audit committee within the board of directors), a twotier board structure (with a management
committee and a supervisory council), and the traditional board structure with the board of statutory
auditors.
36
After the Cadbury Report (1992) in the UK and the Rapport Vienot (1995) in France, the Bank of
Italy (1996) stressed the importance of reforming the Italian corporate governance system. The
consequent debate inspired a new company act for listed corporations (Legislative Decree N.
58/1998, Testo unico delle disposizioni di intermediazione finanziaria, hereafter referred to as
Draghi reform, from the name of the chairman of the steering committee) in July 1998. The
Draghi reform regulates the Italian financial markets and corporate governance in listed companies,
aiming to strengthen investors protection and minority shareholders, by regulating listed
corporations on issues such as public bids, shareholders agreements, minority shareholders rights,
and internal controls. It does not provide any regulation on the structure of the board of directors,
but issues some (articles from 148 to 154) that aim to strengthen the role of the board of statutory
auditors as a monitoring device. P Spada, Diritto Commerciale, Vol.2 Elementi, Padova, 2009,
Ch. XXII.

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be composed by over three auditors) of the members of the board of statutory auditors is
appointed by the minority shareholders, so that the composition of the board reflects the
will of all shareholders.
These dispositions in art.148 determine the extent of protection which minority
shareholders can benefit from, since the minimum requirement for certain powers (for
instance calling a shareholders meeting because of a directors decision) is that they must
be exercised by at least two members of the board. Only when the Collegio Sindacale is
composed of three members can minority shareholders appoint two statutory auditors 37.
Parmalat Finanziarias did meet the legal minimum requirements with a Collegio Sindacale
of three members38; yet its reports to shareholders never denounced any accounting
discrepancies - neither to courts nor to CONSOB. Such quiescence was demonstrated also
by the Collegio Sindacale of Parmalat Spa39, as well as by all of its subsidiaries.
According to Cardia, this silence is a most eloquent one: it confirms how in corporate
systems dominated by block-holders (in this instance personified by Tanzi) the board
merely provides a legitimating device as opposed to an incentive to substantive monitoring,
given the absence of autonomy in relation to the main stockholder40.
The following factual anecdote conveys the extent of this lack of alert on behalf of the
board: one of many examples recently unveiled by the press 41 describes how, in December
2002, a minority shareholder (Hermes Focus Assets Ltd) filed a claim to investigate on the
related party transactions between Parmalat and another company owned by Tanzi

P Spada, Diritto Commerciale, Vol.1 Parte Generale, Padova, 2009, ch.IV.

This is not unusual for listed companies: 92% of the boards of statutory auditors are composed of
three members (as publicized by CONSOBs 2002 Annual report, www.consob.it) and even among
the MIB30 only 31% have a larger board of statutory auditors.
39
Acronym for Societ per Azioni (joint stock company).
40
L Cardia, I Rapporti tra I Sistemi delle Imprese, I Mercati Finanziari e la Tutela del Risparmio.
Testimony of the President of CONSOB at Parliament Committees VI & X, 1/20/04:
www.consob.it.
41
www.ft.com/indepth/parmalat.
37
38

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operating in tourism (HIT Spa). The boards response was: no irregularities found either
de facto or de jure42.

Complacency on behalf of Italian statutory auditors is often explained by referring to fact

that (in concentrated ownership scenarios where managers are controlling shareholders and
directors are closely related to them) statutory auditors are nominated in virtue of personal
or professional ties. Parmalat was no exception. The Civil Code provides specific causes of
incompatibility with the office of member of the Collegio Sindacale, including professional
requirements, above all family and pre-existent professional ties (art.2399, Civil Code).
Nonetheless Parmalats statutory auditors included Tanzis sons, his nephew, and his
brother as well as some of his longest-term business partners. None of these could claim to
fulfill the Civil Codes professional requirements either, given that they were not listed in
CONSOBs professional register, nor were they university professors (as provided in
art.2397).
In addition to this, two issues render Italian corporate governance structures anomalous.
First, statutory auditors do not fit the market incentives account of the gatekeepers role.
The traditional market theory is that any gatekeeper is easily deterred since it shares none
of the gains deriving from fraud but is nonetheless exposed to a major proportion of the
risk (reputation disruption, on top of legal liability)43. Thus while the company remunerates
its auditors, nonetheless auditors still have sufficient incentives to monitor the company
efficiently.
Clearly the assumption is that the gatekeeper enjoys a wide reputation and has some assets
pledged, as company capital or partners unlimited liability. On the other hand a statutory
Attachment of the board of statutory auditors report at the 2003 shareholders meeting: Parmalat
Finanziaria Spa, 2003(b), Investors presentation, April 10th, available at: www.parmalat.net.
43
JC Coffee Jr, Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms
in G Ferrarini, K Hopt, J Winter, E Wymeersch (eds.), Reforming Company and Takeover Law in
Europe, Oxford, 2004, 455 (passim).
42

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auditor has only its own personal assets, which can be easily covered in order to make any
negative judgment difficult to enforce44 and, in addition to this, its reputation is generally
circumscribed within a rather limited number of people mainly the shareholders and
managers appointing the auditor in the first place.
Secondly, CONSOB publicly illustrated its dependence on statutory auditors in disclosing
frauds45 - a passive modus operandi that relies on inadequate agents, ultimately eroding the
quality of public enforcement. CONSOBs policy is founded on a very strict interpretation
of the law emphasizing that statutory auditors have a duty to whistle-blow to CONSOB for
any misconduct detected during their monitoring activities. However, a different
interpretation of the law would be preferable, assigning to the Securities Commission a
proactive role with limited reliance on statutory auditors, who should rather be subject to
intense scrutiny by CONSOB as to the performance of their monitoring duties.

In conclusion, either because of lack of resources, independence or incentives, the board of

statutory auditors failed to assure corporate financial reporting quality46.

G Ferrarini & P Giudici, Financial Scandals & the Role of Private Enforcement: the Parmalat
Case, Working Paper N 40/2005 available at: http://ssrn.com/abstract=730403. On the judgmentproof problem, see S Shavell, Foundations of Economic Analysis of Law, Harvard, 2004, p.230.
45
Report of the Chairman of CONSOB to the Parliamentary Commission: In this institutional
setting it is to be pointed out that the relevant rules, included in the Consolidated Financial Services
Act of 1998, assign a fundamental role to internal corporate governance, primarily to the board of
statutory auditors. This body is bound to timely disclose to CONSOB the wrongdoings found in the
companys management ant to report on the meetings and the enquiries made, trasmitting all
relevant documents. The underlying philosophy of the Consolidated Financial Services Act is that
the internal monitoring body of the company is better placed than a third party to timely spot
possible wrongdoings of the managers and report the same to public authorities such as CONSOB
and public prosecutors. From: A Melis, On the Role of the Board of Statutory Auditors in Italian
listed companies, Corporate Governance - An International Review, 2004, Vol.12, N.1, pp. 75-78.
46
A Melis, Critical Issues on the Enforcement of the True & Fair View Accounting Principle,
Corporate Ownership & Control, Vol.2, No.2, Winter 2005. p.115.
44

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EXTERNAL AUDITORS
A) The International Context.
The raison dtre of this institution is to ensure transparency and supervision on the
monitored companys activities. The primary recipient of the external auditors services is
the financial market, which relies on the information provided in order to asses the
financial situation of the company in question. In addition to this, when dealing with
complex group structures (of which Parmalat Finanziaria and its subsidiaries are an
appropriate illustration) where it is arduous to outline the companys veracious financial
conditions, the judgment formulated by auditors becomes a platform relied upon by both
professional and non-professional traders.
This will reveal to be of particular importance once drawing a conclusion in section 7 of
this paper.

A transatlantic similarity47 can be drawn between Parmalat and Enron. For years Arthur
Andersens auditors legitimized the balances of the Houston company without raising any
concerns regarding the candor, to use a euphemism, of the transactions in question and,
finally, materially participated to the destruction of documents related to the companys
bookkeeping48.
The connivance between Enron and the auditing firm has been imputed to the latters
lucrative role as consultant, yielding more revenue than certifying the companys balance
sheets: the conflict of interest between consulting and auditing eroded the auditors
autonomy until it precluded any critical or objective working49.

Europes Corporate Governance: Parma Splat, The Economist, 1/15/04.

Arthur Andersen LLP vs United States (04-368) 544 U.S. 696 (2005)
49
Benedetto & di Castri (footnote 5), p.20.
47
48

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A study publicized in The Economist in the heat of the Enron collapse, analysed the
entanglement between the big five and their clients. From the diagram below it is possible
to draw a transparent conclusion: multinational auditing companies evolved from
monproduct business models towards a more structured one where auditing represents, on
average, less than 50% of their income. The predominant gravity of the other services
implies a amalgamation of the relationship with the client, thus depleting the level of
independece required for the auditing functions.
Arthur Andersens case exemplifies the Hamletian dilemma between the autonomy of the
auditor and receiving high honorariums for consulting services: as The Economist reports,
in 2000 the firm received (form Enron alone) $52 million, over half of which ($27 million)
not deriving from auditing services.

DIAGRAM 5 (source: The Economist, footnote 47).

21

Candidate N: QLWM8

B) Auditors & Parmalat.

As anticipated in the previous paragraph, the relation between Parmalat and its auditors
reflects the trend analysed by The Economist and exemplified in the Enron case.
According to art.159 of the Draghi reform, external auditors are indicated by the
shareholders meeting and the appointment lasts three years. Amongst the principal
economies, Italy is the sole one requiring compulsory auditor rotation: in other words an
auditing firm may be reconfirmed for only three appointments hence maintaining the
same client for a maximum of nine years.
Grant Thornton Spa (GT) audited Parmalat for eight years, until it was substituted by
Deloitte & Touche S.p.A in 1998, complying (at least formally) with art.159. In this case,
the mandatory rotation norm (which was also introduced in the Sarbanes-Oxley Act 2002,
US's response to Enron and other corporate scandals) proved to be ineffective given that
from 1999, GT (more specifically two of its partners who had actually been auditing
companies related to Tanzi since the 1980s50) went on to serve as auditor to Caymanislands based Bonlat-FinCorp51 which, together with its numerous other subsidiaries,
represented 49% of the group business.
Art.159 prescribes that the screening of a company by its auditor must be limited in time so
as to avoid a dilution of monitoring52 for the protraction of the relationship: nonetheless,
as proved by the Bonlat-GT relation, such norm is stripped of its efficacy in the case of
corporate groups.

50 Mr Pecca, the President of Grant Thornton in Italy, and Mr Bianchi, senior partner at the same
firm, had been auditing Parmalat Finanziaria since 1982, first as auditors of Hodgson Landau
Brands (HLB), then as Grant Thornton (GT).
51 Bonlat Fin. Corp. was controlled by the Malta-based Parmalat Capital Finance, which was in its
turn controlled by Parmalat Malta Holding, 95% of which was detained by Parmalat Soparfi, owned
by Parmalat Spa. Ferraris, CFO, stated that: I admit that through Bonlat, the Parmalat group
occulted losses that I am unable to quantify. Bonlats role as a dump was explained to me by
Tonna [former CFO] when he tendered his resignations. From G Franzini, Il Crack Parmalat,
Editori Riuniti, 2004, Rome, p.79.
52
Benedetto & Di Castri (footnote 5), p.22.

22

Candidate N: QLWM8

Given the financial relevance of corporate conglomerates, the norm should therefore be
subjected to an extension whereby the impossibility of continuing the auditing service
refers not to the individual company but to the entire group of companies, including its
subsidiaries. In addition to this, the difficulties met in reconstructing the group structure
and the activities within the group, demands a single auditor.
Moreover, such a limitation (as currently proposed in art.159) allures the client company
(for example at the end of the first thee-year mandate) to exploit its position to obtain more
complacency from the auditing firm in return for extending their cooperation for another
three years. Therefore it has been suggested an extension of the auditing term to six years
but excluding the possibility of re-confirmation, thereby retaining the necessary continuity
whilst also providing the certainty that a different firm will take over the screening duties
once the term has expired53.

A second legal controversy relates back to the already mentioned position of Mr Penca as
chairman of GT in 2003 despite having been auditor for Parmalat Finanziaria since 1994
for HLB. Applied literally, in fact, Italian law does not expressly preclude auditors from
monitoring the same company more then once, provided they work for a different firm.
Nonetheless art.160 of the Draghi reform ensures the independence, by preventing the role
of auditor being assigned to firms in incompatible situations arising from contractual
relationships () or in cases of partners and directors in particular circumstances which
compromise the companys independence. Whilst generic, the norm could have been
interpreted so as to deny GT any auditing responsibility within Parmalat Finanziaria and its
subsidiaries, on account of Pencas position as its former chairman.

53 http://www.tesoro.it/Documentazione/Commissione_Studio_trasp_soc_quotate.pdf

23

Candidate N: QLWM8

Di Castro elaborates a third critique of the Italian legislature, in which he identifies an

indirect cause of Parmalats denouement. Art.159 determines that the General Meeting is in
charge of nominating and revoking the auditing firm. After the 1998 reform, both nominees
and repeals must be submitted to the supervisory board opinion and no longer to CONSOB.
Benedetto & Di Castro doubt the efficacy of the reform which, whilst coherent with the
private nature of the contractual relationship between auditor and company, does
nonetheless clash with the public requirement of transparency for this relationship54.
CONSOB appears to be better qualified to offer an assessment of the auditors
independence given that the right to elect the managerial apparatus, supervisors and
auditors is endowed upon one institution: the General Meeting.

A further instance for analyzing the implication of external auditors, is represented by the
subcontracting position that GT (through Mr Penca) had assumed as auditors of Bonlat, the
company holding an account at Bank of America where Parmalats 4 billion were
allegedly deposited.
When CONSOB began investigating on the reliability of Parmalats statements on the
matter, Bank of America replied that the document confirming the account was a forgery. It
is unanimous that, had GT been committed to fulfill generally accepted auditing standards,
the fraud would have been short-lived55: cash deposits are not complicated to evaluate as
they can be easily matched to a bank statement as part of a companys reconciliation
procedures56.

54

Benedetto & Di Castri (footnote 5), p.22.

Inter alia: A Melis, Corporate Governance Failures: To What Extent is Parmalat a Particularly
Italian Case?, Corporate Governance, Volume 13 Number 4 July 2005, p.483; Benedetto & Di
Castri (footnote 5), p.21; the harshest criticism is proposed in M Onado, Unautentica truffa
allitaliana, 10/3/2004, available at www.eurozine.com (passim).
56
Melis (footnote 18), p.241.
55

24

Candidate N: QLWM8

In addition to omission, GT breached its fiduciary duties through commission too: both
Tonna (CFO) and Italian prosecutors confirm that the architect of creation of the off-shore
company Bonlat was in fact GT, with the explicit intent of cloaking the actual financial
situation of the group57. Palepu & Healys considerations on the relation between Andersen
and Enron apply, yet again, to Parmalat and its auditors for either the latter were
manifestly incompetent or not independent58.

Neither Deloitte & Touches (D&T) conduct, as anticipated in the above paragraphs, can be
considered immaculate - on the contrary. Cardia offers an extensive account of D&Ts
irresponsibility: even though it was appointed as Parmalats primary auditor in 1999, D&T
had already been involved in consulting services for Tanzis group: it was never concealed
that the appraisal concerning a controversial transaction announced in December 1999,
involving the Brazilian branch, had been prepared by Deloittes corporate finance
department in July 199859.
On top of failing to raise any alarm regarding the imminent financial collapse, the eventual
decision to publicly question Tonna and Tanzis management of the group came not from
within D&T but only as a consequence of CONSOBs insistance. This clearly marked the
beginning of the end for Parmalat: nonetheless, Cardia notes, even at such an advanced
stage, D&Ts contribution to the public authority was limited to underlining how up to
49% of total assets of the group and 30% of the consolidated revenues came from
subsidiaries, which were audited by other auditors60. D&T had, in other words, based their
opinion of Parmalat on GTs reports.

57

Cardia (footnote 40).

Palepu & Healy (footnote 26).
59
Cardia (footnote 40).
60
Ibid.
58

25

Candidate N: QLWM8

In conclusion, whilst the provisions in the Draghi reform (arts.159 & 160) are per se
suitable to ensure the efficacy of the auditing, nonetheless this objective is frustrated by a
lack of independence between auditor and block-holder. This corroborates the thesis
outlined in the introduction to this paper, namely that the causes of Parmalats default are
rooted not in the national legislation but rather in the flaws of the corporate governance
regime as a whole.

26

Candidate N: QLWM8

INTERNAL CONTROL COMMITTEE

Whilst often downplayed in academic literature, the internal control committee is the third
reputational intermediary acting as gatekeeper and its importance, as it is argued here,
should not be lightly dismissed. The same flaws diagnosed for the other two gatekeepers
are to discerned here too, thus leading to similar conclusions.
In 2001 Parmalat formed an internal control committee in compliance with the Preda Code
of corporate governance best-practice61 which reserves the following responsibilities to the
committee (para.10.2):
1) evaluation of the internal control systems competence,
2) monitor the internal auditing staff,
3) report to the board of directors twice per year, and
4) deal with the external auditing firm.
In addition to this, para.10.1 safeguards the committees independence by providing that
majority of the members should be independent directors62.
As Walker empirically proves in his article63, the audit committee is central to effective
control systems: out of recent American financial reporting frauds, the majority of

61

Preda Code (1999, 2002), Codice di Autodisciplina, Milan: Borsa Italiana. This Cadbury-like
code of conduct stem from the same legal background that prompted the Draghi reform (see
footnote n.27): The Preda Code is one of the first examples of self-regulation in the Italian
corporate system, as underlined by Professor Preda himself in his Preface (Preda Code, 1999, p.3).
The Code of conduct focuses on the main gap left by the Draghi reform, i.e. the role of the board of
directors, with a particular emphasis on its composition and appointment. However, it also provides
some recommendations on the role of the board of statutory auditors (Preda Code, 2002, para. 14).
While the Draghi reform (1998) is legally binding for all listed companies, the Preda Code (1999,
2002) is a voluntary code. Similarly to the Cadbury Report (1992, para. 3.7), the guiding principle
in applying the Code is freedom with accountability. Companies are free to choose their own
governance structure given that they ensure the transparency of their decisions, by disclosing
whether they comply with the Code and by giving reasons for any area of non-compliance (Preda
Code, 1999, para. 6).
62
Preda Codes definition of independent director (para.3): a) does not hold significant relations,
directly, indirectly or on behalf of third parties, with the company, its subsidiaries, the directors or
shareholder; b) does not own, directly or indirectly, or on behalf of third parties, a quantity of
shares enabling to influence the company; c) does not have family ties with executive directors or is
in the situations referred to in the above paragraphs.

27

Candidate N: QLWM8

companies involved the audit committee (if at all existent) was either dysfunctional or
illiterate in financial matters64. More specifically relevant to the Parmalat case is Preda
Codes para.3.2 recommending how the role of such an independent committee is
particularly important in companies characterized by block-holders (like Tanzi).
While meeting frequency and accounting literacy were not a grave issue in Parmalats
committee, the principal problem lied in fact with compliance to para.3.2. Out of the three
total members of the committee, two were also part of the executive committee (as opposed
to Preda Codes suggestion that the internal control committee should be composed entirely
of non-executive members, para.10.1); the sole non-executive, and allegedly independent,
member eventually revealed to be also Tanzis chartered public accountant (as it transpired
from prosecutors investigations)65. Independence is completely ruled out when once
considers that one of the three members of the committee was in fact the CFO (Tonna)
who, furthermore, was also chairman of Coloniale Spa (Parmalats main shareholder).
A possible challenge to the above argument could be that the Preda Code definition of
independence does not mirror the modern conceptualization of the term as formulated in
Anglo-American jurisdictions. However, it has already been noted above how the Code
was in fact inspired by the Cadbury report. Moreover, how would Parmalats management
score if judged against, for instance, the Higgs Review approach to independence as a
state of mind rather than something determinable by ticking boxes? While the Higgs
report does not specify that there should be no affiliations or circumstances capable of
influencing directors judgments, it holds that independence should be determined by
DM Walker, Restoring Trust After Recent Accountability Failures, in J OBrien (ed.),
Governing the Corporation: regulation & corporate governance in an age of scandal and global
markets, London, 2005, p.21.
64
WJ McDonough, Accountability in the Age of Global Markets in J OBrien (ed.), Governing
the Corporation: regulation & corporate governance in an age of scandal and global markets,
London, 2005, p.47.
65
S Mengoli , F Pazzaglia, E Sapienza, Is It Still Pizza, Spaghetti and Mandolino? Effect of
Governance Reforms on Corporate Ownership in Italy, 2007, SSRN Working Paper 966085,
available at: http://ssrn.com/abstract=966085.
63

28

Candidate N: QLWM8

taking into account relationships or circumstances66. Whilst such an approach allows

more flexibility, it does nonetheless set a threshold whereby Parmalats management could
not fulfill the most basic requirements.

Yet again, therefore, the principal flaw is to be found in the internal systems lack of
independence, since none of the members of the internal committee fulfill the Preda Codes
definition of independence (see footnote n.62). The presence of the companys Chief
Financial Officer in the committee signified an explicit disregard, on behalf of Parmalats
senior management, of the best-practice guidelines: this implies that the corporation saw its
function as self-monitoring practice67.

66

D Higgs, Review of the Role & Effectiveness of Non-Executive Directors, January 2003, A.3.4,
p.81. Available at: http://www.berr.gov.uk/files/file23012.pdf.
67
Buchannan & Yang (footnote 8), p.42. Melis descends into more detail about this particular issue
in: A Melis, Financial reporting, corporate communication and governance, Corporate
Ownership and Control, 2004, Vol.1, N.2, Winter 2004, pp.32-36.

29

Candidate N: QLWM8

5. ROLE OF FINANCIAL ANALYSTS.

A prima facie consideration of the role of financial analysts might withhold any
accountability on their behalf in scenarios like Parmalats, namely involving falsified
financial statements. The ratio is that they may solely rely on the integrity of the internal
governance agents. However there are exceptions and Parmalat may be one of them.
As diagram 2 (page 6) shows, financial analysts did not identify any flaws until
CONSOBs investigation had almost reached its conclusion: in the year building up to
Parmalats

bankruptcy

(November

2002

October

2003)

the

mean

analyst

recommendation listed for the company was 1.6/5 with no SELL recommendations.
The Treadway Commission Report68 identified a threefold standard to assess the risk of
fraudulent reporting: oversight issues, performance pressures, changing structural
conditions. The first two requirements, it is submitted, were left unfulfilled to such an
extent that any sophisticated financial investor could (and should) have noticed.
In relation to oversight issues, Tonna and the companys senior management resorted to
elaborate ownership structures to execute Parmalats business strategy which imposed
obstructions on analysts to effectively verify its operations 69. With respect to performance
pressures, Melis notes that these were

68

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a US

private-sector organization that in October 1987 issued the Report of the National Commission on
Fraudulent Financial Reporting containing recommendations on the financial information reporting
system.
69
Buchannan & Yang (footnote 8), p.44-45; Melis (footnote 25), p.246.

30

Candidate N: QLWM8

due to a high level of debts that characterized its

financial structure which, without a reported rosy
performance, would have led to insurmountable costs in
the raising of capital and curtailed the controlling
shareholders interest in empire building70.

In order to demonstrate how a competent analysts should have identified Parmalats

underlying flaws, one can refer to the publicly available company statements71.
The first observation is an obvious one: while in April 2003 the companys management
held that Parmalat is a food group with a focus on milk, dairy products and beverages72,
on the other hand, a glance at financial statements dating back from 1998 show that cash,
equivalents and other short-term securities represented a quarter of total assets, peaking in
2002 when they represented 33% of total assets. Arguably there is nothing objectionable in
a company turning its business from diary products to finance, however minority
shareholders should have been informed about the risk undertaken: financial analysts
should have taken the responsibility of noting how the prominence of securities trading
(compared to a diametrically different core business such a diary products) demanded a
change in risk assessment.
The second observation stems from the exponential increase in cash and equivalents
(diagram 6, below): why did Parmalat not use it to pay off its debts? An obvious
explanation to this is the income of such assets in off-shore banks is not subject to tax, and

70

Melis (footnote 25), p.246.

Parmalat Finanziaria Spa 1998, 1999, 2000, 2001, 2002 Annual Reports; Parmalat Finanziaria
Spa 2001, 2002, 2003 Informativa sul sistema di Corporate Governance della sezione IA.2.12
delle istruzione al Regolamento di Borsa Italian Spa (Report on Corporate Governance); Parmalat
Finanziaria Spa 2003(a) - interim reports. Available at Parmalat Finanziaria Spas website:
www.parmalat.net.
72
Parmalat Finanziaria Spa 2003(b) - Investors Presentation, April 10th. Available at Parmalat
Finanziaria Spas website: www.parmalat.net.
71

31

Candidate N: QLWM8

debt interests are tax-deductible73. These claims are unfounded, for whilst such strategy
could be fiscally profitable, nonetheless the relatively small amount of the reported
interested earned does not seem to justify such an aggressive financial structure74.

DIAGRAM 6: amounts expressed in millions of euros (source: Melis, footnote 23).

73
74

Parmalat Finanziaria 2003. Investors Presentation, April 10th: www.parmalat.net.

Melis (footnote 25), p.250.

32

Candidate N: QLWM8

6. DOES ITALIAN LEGISLATION FACILITATE AUDIT FAILURES?

In his article Corporate Governance & Auditor Independence, Ebke demonstrates how
auditing failures are an issue of enforcement, not substantive rule75. Ebke approaches the
subject at an international level from a theoretical point of view yet, as this paper argues,
the same ratio can be applied to the more circumscribed and practical circumstances of
Parmalat, leading to the conclusion that Italian auditing principles and laws should not be
held accountable, per se. An accusing finger should rather point at private and public
enforcement of these norms.

a. Primary supervisor liability

Section 3 b) briefly touched upon what is the most ubiquitous critique: the lassitude of
Italian legislation with regard to the connection with primary and secondary auditors,
initiated the process that eventually lead to bankruptcy. On the other hand it cannot be
ignored that national auditing standards do incorporate International Standards on
Auditing (ISA) as well as International Standards on Assurance Engagements (ISAE) 76.
In addition to this, even national jurisprudence provides an important precedence: the facts
presented to the Milan Tribunal on October 21, 1999, raised the identical legal issue as the
one posed by the cooperation between GT and D&T. It was held that the primary auditor
cannot accept without criticism the work of the secondary auditor () but has a duty to
ascertain

the procedures

followed by it

[secondary auditor]

and access

its

documentation77.

Werner F. Ebke, Corporate Governance and Auditor Independence: The Battle of the Private
Versus the Public Interest, G. Ferrarini, K. Hopt, J. Winter, E. Wymeersch (eds.), Reforming
Company and Takeover Law in Europe, (Oxford, 2004), 507.
76
Issued by IAASB. Available at: www.ifac.org.
77
Milan Tribunal, 21/10/1999, FIN.GE.M. v. Price Waterhouse and other defendants, Giur.it.,
2000, 554.
75

33

Candidate N: QLWM8

The courts judgment is unequivocal and, moreover, the principles on which the Italian
accounting practices are do not stem from a parochial context but rather from the
international arena: the acrimony displayed towards the allegedly relaxed Italian auditing
standards is, therefore, misleading.

b. Independence
Even under this aspect, Italian laws should not be dismissed as neither lenient nor
permissive. Auditing firms must have an exclusive activity in order to be included in the
CONSOB register of auditors entitled to certify listed companies financial reports78: any
provision in the companys statute concerning non-audit services precludes the firm from
registration.
Art.159-163 CFSA, moreover, lay down meticulous instructions on how the shareholders
meeting should nominate the firm to act as auditor and how the latters independence
should be asserted by CONSOB. Given that a good proportion of Italian companies
emulate the Parmalat model with one predominant shareholder, nomination of auditing on
behalf of shareholders inevitably leads to a scenario comparable to the pre-Sarbanes-Oxley
Act one in America, when public companies had their auditors nominated by the
management79.
As for CONSOB, the public overseer dictates the auditing principles to be followed by
registered firms: when these are contravened to a grave extent, or if the firm has lost the
prerequisite required to be recorded in the register, CONSOB may strike the auditor off the

78

Art.6 Legislative Decree n.88/92, referred to by art.161 Consolidated Financial Services Act,
CFSA.
79
Ferrarini (footnote 44), p.28.

34

Candidate N: QLWM8

registry. Accordingly, disqualification is the main administrative remedy (Art.163

CFSA)80.
Yet again, it is the enforcement stage of the existing rules that poses a contention. In
Ferrarinis words, in order to circumvent independence criteria, international auditors
have organized their activity through a network of companies that are formally independent
from the auditing entity but are linked through participation agreements81. Such
participation agreements have always gone unchallenged82: CONSOB never focused on
non-audit services, even though auditors are flagrantly marketed as multifunctional firms.
Already with this succinct outline of the independence requirement and its applications, it
emerges that whilst normative dispositions are in fact not only present but valid too, these
are not followed by equally present and valid enforcement on behalf of CONSOB. PostParmalat academic literature links the involuntary laissez-faire attitude of the public
watchdog with a lack of resources83: relying almost exclusively on allegations brought
forward by statutory auditors, it would be fair to accuse CONSOB of intentionally refusing
to embrace a proactive law enforcement approach and limiting itself to make amends
against the auditing firms after the controversy had developed84.
It is interesting to note that this very conclusion on authorities retroactivity has also been
reached in relation to CONSOBs transatlantic counterpart: the SEC. Kroger, in fact,
criticizes the Sarabanes-Oaxley Act for dedicating enough attention to what ought to have

80

Ibid.
Ibid.
82
P Balzarini, Commento allart. 161 TUF, in P Marchetti & LA Bianchi (eds.), La disciplina
delle societ quotate, Vol.II, Milan, 1999, pp.1898-1901.
83
G Ferrarini, P Giudici, MS Richter, Italian Company Law Reform: Real Progress?, Rabels
Zeitschrift fuer auslaendisches und internationales Privatrecht, Vol.69, N.4, October 2005, p.687697.
84
Italaudit S.p.A. (previously Grant Thornton S.p.A.) was cancelled from the Registry on the 28
July 2004 (CONSOBs resolution No. 14671). Mr Bianchi was disqualified for the audit services
rendered to Cirio in 2002 with CONSOB decision no. 14480 dated 23/03/2004. Two days later it
was Mr Baudos turn for the audit services rendered by Deloitte to Cirio in 2001 (CONSOB
decision no.14488 dated 25/03/2004).
81

35

Candidate N: QLWM8

been one of the fundamental post-Enron reforms namely improving the SEC's ability to
proactively investigate and uncover widespread and systematic securities violations before
millions of investors are harmed, instead of waiting to investigate until the problems have
exploded publicly in the headlines of the Wall Street Journal85. The diagnosis and remedy
described for SEC are identical in respect to CONSOB.

c. Liability Rules
A third widespread truth is the gap between the Anglo-American and European level of
private enforcement Italy being far from an exception: this is undoubtedly an empirical
truth and cannot be disputed86. Paradoxically, it is just as objective that the Italian law on
books is rigorous and, theoretically, does not auditors to evade their liability for damages.
Following the 2004 amendment of the Consolidated Financial Services Act, art.164(1)
foresees liability towards the audited firm and creditors by referencing to Civil Codes
Art.2407, providing that the insolvency liquidator of large insolvent companies are entitled
to bring actions against the statutory auditors and the audit firm, accruing both the
companys and the creditors actions.

Liability is also ascertained from general contractual obligations norms as well as civil
responsibility (ie. law of torts) as Ferrarini comments, as for the nature of the auditing
firms liability, it clearly is contractual when the company is suing 87. Auditors are not
entitled to defenses of in pari delicto (ie. claiming non liability on the basis that the
JR Kroger, Enron, Fraud and Securities Reform: An Enron Prosecutors Perspective,
University of Columbia Law Review, 57 (2005) at 64.
86
J Armour, B Black, B Cheffins, R Nolan, Private Enforcement of Corporate Law: An Empirical
Comparison of the US and UK, European Corporate Governance Institute, Finance Working
Paper 234/2009 February 2009.
87
Ferrarini (footnote 44), p.32.
85

36

Candidate N: QLWM8

company is at fault too), contributory negligence given the auditors purpose in the first
place: in the words of Bussoletti, in fact, a party whose duty is in fact to monitor cannot
escape liability by asserting that the monitored party concurred in the damage, since the
gatekeeper was rewarded in order to prevent managers misbehavior88.
On this point, Italian jurisprudence can only confirm the above assertions: in the sole case
on this issue, the defense of contributory negligence pleaded by KPMG was dismissed89:
the law provides that auditors must be appointed by shareholders (as outlined above) -Italian law, therefore, also asserts (very much like the House of Lords in Caparo90) that the
whole function of auditors reports is in fact to share the information with the stakeholders
in order to probe how their company is run.

By initiating an action in tort, the burden of proof rests on the claimant, who must
successfully demonstrate how the auditor intended to cause damages; on the other hand, in
a contractual action it is the auditor that must avoid liability through a due diligence
defense91.
Either way, if it is the companys liquidator or its creditor that claim damages, the auditor
is jointly and severally liable with negligent directors and statutory auditors. Should
investors initiate a claim, then the company is liable too, since towards innocent third

88

M Bussoletti, Le societ di revisione, Milano: Giuffr, 1985, p.352. The view expressed by
Bussolletti, whilst widely endorsed by the academic community, is not however unanimous. See
inter alia: A Rossi, Revisione contabile e certificazione obbligatoria, Milano: Giuffr, 1985, p.192;
D Casadei, La responsabilit della societ di revisione,Milano: Giuffr, 2000, p.149.
89
Turin Tribunal, 18/09/1993, Istituto Fiduciario Centrale c. KPMG, Giur. it. I/2 1994, p.655.
90
Caparo Industries plc v Dickman and others, [1990] 2 AC 605.
91
E Barcellona, Responsabilit da informazione al mercato: il caso dei revisori legali dei conti,
Torino: Giappichelli, 2003, p.21. It should however be noted that Barcellona also adds that when
the contract concerns duties and not specific results, the burden of proof lies on the plaintiffs
shoulders.

37

Candidate N: QLWM8

parties the directors acted on behalf of the company, which accordingly is responsible for
their misstatements92.
Parmalats debacle inspired numerous Italian academics to asses the above norms
governing auditors liability, comparing them to US norms, even after SOA 2002. Italian
norms strike as significantly more rigid, considering that in American courts defenses like
those referred to above, are often successfully applied93.

d. Private Enforcement.
Even with reference to the case law, rigid regulations translate into weak enforcement (and,
consequently, weak deterrence). There are only four reported cases on auditor liability.
Together with the KPMG case (footnote 89), two cases concern actions by purchasers of
controlling stakes claiming that the price paid in an acquisition was overvalued due to
financial misstatements that the auditor should have detected94 or claiming that the
auditors appraisal of the true equity value of the target company was wrong95. Finally one
should note the successful claim of a company suing its auditors, directors and statutory
auditors after entering into a void contract as a result of which it had paid consultancy fees.
It was held that the company would have not paid the illegal fees had the auditors properly
screened the relevant contract96.

92

Ferrarini (footnote 44), p.33.

As an example of Italian scholars comparing Italian against US liability norms: Barcellona
(footnote 91). Most academics (Barcellona, Ferrarini and Giudici) refer, for these purposes, to RP
Swanson, Theories of Liability, American Law Institute American Bar Association Continuing
Legal Education ALI ABA Course of Study, 2004.
94
Milan Tribunal, 18/06/1992, Banca Popolare di Milano, Bipiemme Leasing v. KPMG, Giur. it.,
1993, I, II, c. 1.
95
Cassation Court, 18/07/2002, n. 10403, Arthur Andersen v. Carraro, Foro it., 2003, 1, 2147.
96
Rome Tribunal, 26/04/1999, Alumix v. Reconta Ernst & Young, Soc., 1999, 1232.
93

38

Candidate N: QLWM8

These numbers are significant there might be unreported cases but this does not alter the
inevitable conclusion that should be drawn by such a marginal number of cases in this
field: private enforcement is too feeble97.

97

Ferrarini (footnote 44), p.32.

39

Candidate N: QLWM8

7. CONCLUSIONS.
Rivers of ink have been spilled to analyze the causes of the Parmalat scandal: given the
breadth and complexity of the subject, this paper limited its focus on what are (as it was
here submitted) the main actors in these events, the gatekeepers.

By analyzing Parmalats control structure, the contention advanced is that the role of
controlling shareholders, whilst fundamental, should not be considered in isolation but
rather with an appreciation of why the financial reporting and corporate governance
systems foundered so catastrophically.
Section 3 outlined the importance of accounting standards in order to answer whether
Parmalats default was prompted by an inadequacy of nationally approved accounting
standards. The answer is that financial misreporting is merely the most apparent
controversy: the companys demise was in fact caused by false accounting, as opposed to
financial engineering.
Compared to Enron, Parmalat did not contravene (at least formally) any accepted
accounting rules: this substantiates Forkers theory on the inevitable link between
controlling shareholders and a low standard of corporate communication 98. Thus, applying
this to circumstances analyzed in this dissertation, the real issue for Italian corporate
governance is respecting such accounting principles despite the resistance from blockholders promoting their own interests over the true & fair view.
The inherent lack of independence, almost pathological amongst the three gatekeepers
considered in Section 4, resulted not in a lack of information but rather in wealth of
disinformation. This failure on behalf of gatekeepers should not be utilized as an umbrella
to protect financial analysts from their responsibilities: Section 5, in fact, proved that any
J Forker, Corporate Governance and Disclosure Quality (1992), Accounting and Business
Research, 22/86, p.111.
98

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Candidate N: QLWM8

rating agency could have detected Parmalats ill-disguised vulnerability simply referring to
publicly-available data.
This demonstrates that the failures unfolding the Parmalat scandal were systematic and
rooted in a deeply flawed corporate governance regime in the financial markets where it
operated. The demonstration of the thesis put forward in this paper, leads to the conclusion
that Italy necessitates to promote its public and private enforcement mechanisms to
increase deterrence and weaken the role of secretive practices and social networks.

The financial press99 unanimously describes the Parmalat debacle as a particularly Italian
scandal. However, while the case does present some idiosyncratic aspects, it has been
proven that Italian substantive rules cannot be blamed; nonetheless, the role played by
external auditors and by the internal control committee as inefficient monitors denote that
Parmalat is in fact comparable with Enron and other global corporate scandals.

R Heller, Parmalat: a particularly Italian scandal, Forbes, 30/12/2003 (www.forbes.com); M

Mulligan & W Munchau , Comment: Parmalat affair has plenty of blame to go round, Financial
Times, 29/12/2003; E Lyman, Parmalats problems: an Italian drama, The Washington Times,
12/01/2004; Times special report (footnote 7).
99

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Candidate N: QLWM8

WORD COUNT: 9957.

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