Financial Reporting, Corporate Governance and Parmalat. Was it a Financial Reporting Failure?

Abstract

This paper examines the Parmalat case, with particular regard to the accounting and corporate governance issues which caused the scandal. The aim of the paper is to understand why the financial reporting system and the corporate governance system have failed in the Parmalat case. It describes the ownership and control structure at Parmalat, with special attention to the role of the Tanzi family as ultimate controlling shareholder. It argues that although financial misreporting is the most evident issue, it is not due to a lack of the generally accepted accounting principles that allowed Parmalat to obscure its true financial position. The role of the board of statutory auditors, the auditing firm, and the board of directors is examined to describe the failure of these gatekeepers. The paper also investigates the role of demand side information agents, with a particular focus on financial analysts, and discusses to what extent an external analyst could have been suspicious of Parmalat's reported economics and financial results.

Keywords: Corporate governance, accounting, Italy, Europe, audit, Parmalat, gatekeeper, financial reporting, financial statement analysis, board of statutory auditors, fraud

JEL Classification: M41, M49, M43, G29, G34, K22