In a perverse exchange of gifts over the holiday season and as clear a demonstration of trans-Atlantic co-operation and affinity even the most diehard could hope for, the United States of America and Europe shared some of their least desirable valuables to close a year of great import to both sides. The UK gave to the United States mad cow disease, or to use its proper name Bovine Spongiform Encephalopathy (BSE), a gift which Mr Bush is reported to have accepted most reluctantly. Even Guyana whose technology is hardly likely to recognise BSE if it comes properly labelled, has joined the growing list of countries banning the importation of US beef.
And America gave to Italy, a close friend in the war on terror, Enronitis, the illness that derives its name from the Texas-based multinational giant which collapsed two years ago earning the dubious distinction of 'the world's biggest bankruptcy.' Fortu-nately, it held this position for less than four months until WorldCom, another US corporation overtook it, while revealing that the billions of dollars of deferred expenditure it was carrying on its books was just an accounting ruse to manipulate profits.
Enronitis
Of course those are symptoms which do not help those unfamiliar with the intricacies of the mystical science of accountancy to understand what Enronitis is. It is the illness that is caused where corporations have 1) directors who are so good and great and in such demand that they have no time to pay any attention to the business for which they have been hand-picked; 2) an iconic Chairman/CEO who knows how to play the power games both inside and outside of the company; 3) bright and often young accountants willing to do what the bosses say; 4) byzantine and crooked accounting that dazzles the auditors, who 5) have been associated with the company for so long that the relationship becomes so cosy that the auditor signs wherever and whatever management tells them to, all the while looking around for non-audit fee opportunities.
Enronitis requires attendance and treatment by a turnaround specialist/receiver assisted by lawyers, bankers and financial specialists, but with many of the senior management sent on leave or put behind bars. The best and probably most common outcome is a severely changed entity and in extreme cases, Enronitis may lead to death. However, the coterminous demise of the audit firm was unique to Enron itself - so far.
Europe's Enrons
The Italian debate which is currently rocking financial, accounting and regulatory communities on both sides of the great ocean is not the first European company to be afflicted by Enronitis. First came the Paris-based multinational company Vivendi Uni-versal, a relatively small water utility that Jean-Marie Messier, up to lately regarded as one of Europe's best managers and entrepreneurs, had built up into a media empire, in the process forcing the company to the brink of bankruptcy with unbearably large debts and leading to
inevitably, his own downfall.
The meltdown at Vivendi continues to reverberate, and only last month the company agreed to pay US$50M to settle accusations by the US Securities and Exchange Commission (SEC) that it misled investors in its news releases and financial statements, had engaged in misconduct to try to meet earnings goals and had violated accounting principles. The settlement was particularly costly for Mr Messier, who as part of the settlement had to give up claims to a severance package of US$26M which he persuaded his directors to give him as a condition for his departure. The SEC's jurisdiction arose because Vivendi had raised money in the US.
Then there was Ahold, the Dutch food giant which in 2003 reported that internal auditors had unearthed accounting irregularities
amounting to about US$1B at its various companies, including the Columbia-based US Foodservice. These developments prompted a criminal investigation, including visits to the offices of the company's external auditors, Deloitte Touche Tohmatsu, who told the financial press that the contact with Deloitte was as "potential witnesses rather than suspects." External auditors always hasten to establish that fraud detection is not one of the objectives of their audit, and that it is management that bears responsibility for the financial statements. The duty of the auditor, the profession says, is to report whether those statements show a true and fair view. Surely, significant
frauds distort such a view, but that's what the profession says.
Parmalat
And now, Parmalat, a dairy and food giant operating in several countries and continents with some 36,000 employees and turnover in the billions. Up to November the company was sailing fairly smoothly and as usual, a number of its key men were in various countries on company business. On their return for the Christmas, many of them, including Chairman and CEO Calisto Tanzi, Parmalat's founder, patriarch and boss, were met by Italian investigators, and to use that famous euphemism were said to be "co-operating with the investigators."
Parmalat's Pandora's box was opened in November 2003 when the company was unable to redeem $180M Eurobond, a significant portion of which it was believed had already been redeemed. While liquidity problems are often temporary and not always fatal, suspicions were aroused because the company's financial statements were showing it had almost $5B in cash and readily convertible assets. Such a strange situation called for an outside eye. Following the recruitment of turnaround expert Enrico Bondi, the appointment of investigators and the arrest of an increasing number of company officials and outside professionals, the investigators have revealed that Parmalat had engaged in a convoluted scheme to invent assets of a yet-to-be-determined amount to offset the billions in liabilities acquired over more than a decade.
Parmalat too sought to play in the big financial arena in New York where up to early December, the Chairman and his son, who is also a director, were meeting with a private equity firm to discuss a leveraged buyout. (The takeover of a company financed by borrowed funds often using the company's assets as security for the loan.) Consequently the SEC also has jurisdiction in the matter and has sued Parmalat for inducing investors in the United States to buy more than $1.5 billion worth of bonds and other securities while engaging in "one of the largest and most brazen corporate financial frauds in history." In an action brought in federal court in New York, the SEC accuses Parmalat and its top managers of "materially overstating the company's assets and materially understating its liabilities," while marketing its securities to US investors. Clearly Parmalat's problems have only just begun.
Parmalat v Enron
Not surprisingly, commentators are making comparisons with Enron and they are indeed many. Both Enron and Parmalat were the eighth largest companies in their respective countries, they had larger than life CEOs, a maze of subsidiaries running into hundreds, dealt quite significantly in derivatives, extensively utilised special purpose vehicles and had some fancy accounting while receiving clean reports from the auditors. They both had audit relationships which were far too cosy for their own good and which not even the audit rotation rules in Italy managed to sever. They also both collapsed with great suddenness while everyone was asleep.
However, it is unlikely that Enron will take kindly to the comparison with Parmalat. There simply could be no replication of Ken Lay who became addicted to the trappings of corporate royalty, spending most of his time playing power broker, trading personal notes with presidents and hob-nobbing with world leaders, and who in the eyes of his directors was the man who could walk on water. Fausto Tonna and Luciano Del Soldato, the arrested former chief finance officers of Parmalat were not in the league of Jeff Skilling and Andy Fastow of Enron, whose brilliance in conceptualizing some of the most devilishly clever accounting schemes dazzled the bankers, the financial press and the auditors, Arthur Andersen. Like Enron, Parmalat's board did have severe conflicts of interest, but these were with father, sons and daughters of the founders. Parmalat did not have on its board the likes of Wendy Gramm, wife of a US Senator, Robert Jaedicke, Dean of the Stanford Graduate School of Business, and Lord John Wakeham, former British Secretary of State for energy. Enron will point out as well that Parmalat did not have the massive Indian subsidiary in the state of Maharastra or any one with the attraction of the glamourous Rebecca Mark. The survivors of the now deceased Andersen among the world's top auditing firms will also resent a comparison with Grant Thornton, a second-class firm.
Parmalat also had a distinctive Italian flavour, given its passion for football, the Catholic Church and the family connection. Mr Tanzi demonstrates that nothing can keep him away from his dedication to Catholicism by attending mass and receiving communion at the prison chapel. The country's leader Silvio Berlusconi did not refer to 'corporate crooks' as President Bush did when the scandals broke in the US, but rather hastily introduced legislation protecting Parmalat from its creditors and competitors. Parmalat also owned one of Italy's major football clubs, Parma, which had twice won the prestigious UEFA Cup. Enron's favourite club was not so lucky.
Family businesses are still the essence of Italian capitalism with consequences for poor governance as we have seen with Fiat, Gucci and the media empire of the Prime Minister himself. Family icons are second only to the mafia in terms of raw power, exerting tremendous political influence and sway over the Italian society which is heavily influenced by the Catholic belief in forgiveness.
Conclusion
Apart from the investigations in Italy and the US and the suspension of trading in shares in the company on the Milan Exchange, Mr Bondi, the sole administrator, is desperately trying to determine the extent of the hole in the accounts - estimated at between $8B to $15B - and the amount siphoned off by Mr Tanzi.
The world anxiously awaits answers to questions about the size of the fraud and the role of the auditors, an issue in which readers will no doubt have great interest and to which Business Page will turn next week.