Western Sydney University - Parmalat Corporate Governance Report

This report examines the corporate governance failure of Parmalat, a significant case of corporate collapse in the 2000s. The analysis identifies three major failings: concentrated shareholding controlled by the Tanzi family, underreporting by statutory auditors, and the composition of the board of directors with family ties. The report explores mechanisms to mitigate such failures, including a strong internal audit function, an independent board of directors, and the crucial role of external auditors. The absence of internal audit, complex business structures, and lack of control over diversification are highlighted as contributing factors. The report emphasizes the importance of these mechanisms in preventing similar corporate governance failures and ensuring financial reporting quality. The role of non-executive directors, auditors, and the internal audit committee are discussed, with the internal audit function, board of directors, and external auditors being highlighted as the most critical controlling mechanisms. This assignment provides a comprehensive overview of the Parmalat case and its implications for organizational governance and performance management.

organizational governance and performance management

Answer 1
The corporate governance refers to the framework of moral principles and the
regulatory prescription as applicable to an organisation that guides the business activities, in
light of the interest of the varied stakeholder groups. A number of reasons contribute to the
corporate collapses. The corporate governance failure of Parmalat is regarded as one of the
prime cases of the corporate collapses occurred in the 2000s and the reasons contributing the
same are explained below. One of the chief reasons that led to the downfall of Parmalat was
the concentrated shareholding pattern and the ownership of the entity (Dibra, 2016). It is vital
to note that the Parmalat was a complex group of syndicates that was controlled by the Tanzi
Family. In spite of the applicability of the ownership disclosure rules, the traceability of the
ownership structure was not easy. The large block holders of the company had used the
power to pursue their individual interests by the exercise of the dominating control over the
minority shareholders (Abid & Ahmed, 2014). The second chief reason for the said corporate
failure was the underreporting by the statutory auditors of the Parmalat. It is significant to
note that the minority shareholders were not given the legitimate security and that their
complaints did not make it to the reports of the statutory auditors ever. Thus, a substantive
monitoring system was missing from the entity. The yet another reason that contributed to the
corporate collapse was the composition of the board of directors of the entity. It is vital to
note that while the group of the board of directors of the company was comprised of thirteen
members, the four members including the Chairman-CEO had family ties with the Tanzi
family. The above situation can be characterised as the huge concentration of powers in the
board of the directors and the fact that the same person was the major shareholder of the
company undermined the independence of the board of directors of the entity (Adams,
Hermalin & Weisbach, 2010).
Answer 2
Some of the mechanism that could have been in place that could have reduced the
probability of the corporate collapse of the Parmalat are stated as follows. There was an
absence of the internal audit function in the entity. The board of the directors had employed
loose internal control functions which facilitated them to window dress the accounting
records and the financial statements. The same could have been prevented, had there was a
sound internal audit conducted within the entity. Further to state, the company had expanded
around the globe with the help of numerous of the subsidiary entities in the varied areas such

as the finance, food consulting, tourism, soccer club and others. The picture below depicts the
complex diversification of the organisation.
(Source: Ogutu, 2016)
Though there were disclosure requirements in the place, yet the complex business
structure of the entity prevented the transparent reporting. It is significant to note that for the
sustainability of a strong governance process, the ownership structure of an entity must
possess an ease of understanding and traceability otherwise, a strong shareholder indulges
into the exploitation of the minority shareholders, conceal illegalities and perpetuate fraud
easily. Thus, there was an absence of control over the levels of diversification of the entity.
Answer 3
According to me, three of the above are the most important controlling mechanisms
out of the above mentioned are that of the internal audit function, board of directors and the

role of the external auditors. The internal audit function is referred to as the independent
review of the operations of an entity set up by the management. The Cadbury Code as
published in the year 1992 is also suggestive of the improvement of the internal mechanisms
to build a cordial relationship between corporate governance, audit and internal control, and
the overall financial reporting quality of an enterprise. The reason for the significance of the
internal audit function is that the same extends beyond financial controls. The internal audit is
inclusive of the audits of information that falls out of the purview of the financial information
as well and the controls that support the assembly of this information are additionally
examined. The information derived aids in the communication of information related to the
risks and controls in the relevant areas of the organization and thereby engages into the
coordination function of the activities among the various parties such as the external and
internal auditors and the board, (Lenz & Sarens, 2012). The second vital mechanism is the
composition and the functions of the board of the directors. The first reason of the vitality is
that the other mechanism are dependent on it that is the appointment of the suitable internal
auditors, external auditors and the effectiveness of the internal audit function. The second
reason is that when the shareholders are dually the board of directors of an entity, the
composition of the board of directors and the inclusion of the non-executive directors are in
control of them. The third reason for the vitality of the directorship mechanism is that the
same group supplies the accounting information which is relied by the external and the
internal auditors (Jones, 2011). The next significant mechanism that plays a crucial role in the
corporate governance is the external audit function. It is quite evident in the case of the
Parmalat that the auditor relied on the external confirmations in terms of the bank balance for
the preparation of the audit report and which turned out to be bogus (Alabede, 2012). Thus,
involvement of the professional care in the functions of the auditors is a substantial
component in sound corporate governance.

References
Abid, G., & Ahmed, A. (2014). Failing in corporate governance and warning signs of a
corporate collapse. Pakistan Journal of Commerce and Social Sciences, 8(3), 846-
866.
Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in
corporate governance: A conceptual framework and survey. Journal of economic
literature, 48(1), 58-107.
Alabede, J. (2012). The role, compromise and problems of the external auditor in corporate
governance. Research Journal of Finance and Accounting, 3(9).
Dibra, R. (2016). Corporate Governance failure: the case of Enron and Parmalat. European
Scientific Journal, 12(16).
Jones, M. (Ed.). (2011). Creative accounting, fraud and international accounting scandals.
UK: John Wiley & Sons.
Lenz, R., & Sarens, G. (2012). Reflections on the internal auditing profession: what might
have gone wrong?. Managerial Auditing Journal, 27(6), 532-549.
Ogutu, E. O. (2016). Corporate Failure and the Role of Governance: The Parmalat Scandal,
International Journal of Management and Information Technology, 11(3), 2749.