the economist (2004) -...

Corporate Social Responsibility and the Law

BUSM4139

Group Assessment

ParmalatFeb – 2014

Jason Gould:

Daniel Milosev:

Daniel Cross: S2106762

Daniel Milosev: Jason Gould: Daniel Cross: S2106762

Executive Summary

The purpose of this report is to analyse the Parmalat scandal of 2003, in particular the CSR

policy framework that existed at the time of the framework. How did Parmalat comply or

digress from this framework and what were the legal and social consequences as a result. The

report also analysis the impact of the CSR policy or lack of and the influence or change this

has had on internal and Government policy since.

It identifies the particular areas of Italy’s code of best practice that were manipulated by the

key stakeholders throughout the scandal. The lack of corporate governance and SR policy

within the organisation allowed the stakeholders to maintain majority control through

ownership, manipulate policy for an unbalanced board of directors and internal control

committees that lacked independence. These factors created an environment that allowed for

fraudulent and illegal behaviour to continue without raising suspicion.

The report assesses the failure of the existing CSR policy and how that has influenced and

shaped the current CSR policy of Parmalat. In particular the influence the policy has created

improvements in accountability, corporate governance, improved transparency and accuracy

of reporting and promoted stronger minority shareholder protection policies. This policy and

its framework has since been adopted by the Italian government and other Europe nations to

guide their corporate governance policies.

The report identifies the individual motivation of the stakeholders, looking at how a stronger

policy may have discouraged or reduced the duration of the scandal. The nature of the

pyramid structure of ownership structure is typical of many large European countries. The

scandal has encouraged the Italian government to change laws and corporate governance to

encourage transparency and accountability to minority shareholders in majority family owned

public companies.

The report identifies the need to improve international standards of internal accounting,

financial reporting and external auditing. By having strong processes for detecting fraud in its

early stages and consistency across nations to maintain investment confidence for minority

shareholders


Contents

1. Introduction

2. Company Overview

3. CSR Policy Framework

4. Compliance/Non-compliance to Policy

5. Legal and Social Consequences

6. Impact of a CSR Policy

7. Conclusion

8. References

9. Appendix


1. Introduction

This report is an analysis of the decade long Parmalat scandal revealed in 2003, considered

one of Europe’s largest financial scandals to date. The report analyses the lack of corporate

governance and CSR framework within Parmalat and identifies the key factors within Italy’s

code of best practice that were manipulated by the Tanzi family and accomplices to perform

the scandal. These being powers of control by majority shareholders, lack of independent

directors at board level and within internal monitoring committees, as well as the oversight

from external auditors over three auditing terms. The report addresses the CSR policy or lack

of at the time of the scandal. Identifying the CSR and corporate governance was purely for

surface value to avoid suspicion.

The report analyses how the scandal has forced what remains of Parmalat to readdress their

CSR policy and governance framework, to survive and appeal to new investors. This new

policy has inspired a benchmark status throughout Italy and Europe as it targets transparency,

accountable corporate governance, accurate reporting and minority shareholder protection.

The new policy identifies all stakeholders, their responsibilities and encourages a lead by

example approach, starting from the top down.

The report identifies where Parmalat failed to comply with an effective CSR policy or adhere

to Italy’s laws and corporate governance policy. This failure was driven by self interest

motives from the top. The report recognises the qualities of character and their behaviour,

discussed by Kohlberg and Benjamin. Starting from the top down the self interest motives

slowly poisoned the organisation. Failing to make leaders accountable and as a result

decisions were approved, that took away from the company and resulted with illegal actions

by certain individuals.

The impact of the poor CSR framework resulted in a number legal convictions of key

stakeholders in the organisation. The report also recognises the lack of quality CSR

framework from Parmalat has since encouraged new laws in Italy and new corporate

governance policies. It has also raised awareness of the need to improve international

auditing standards. As well as policy and auditing measures that create transparency and

accountability in majority family owned companies, without stifling their ability to perform.


2. Company Overview

Parmalat is an Italian dairy and food giant with subsidiaries operations throughout Italy and

around the world. In 2003 Parmalat went into protected bankruptcy as a result of a fraud

scandal extending over a decade and involving sums estimated over 8 Billion EUR. At the

time of the scandal Parmalat was rated the lowest of all 69 Italian companies rated on the

Institutional Shareholder Service’s Global Corporate Governance Quotient.

When the scandal was initially revealed it was pigeon holed as a classic example of the

corporate governance weakness of typical Italian company ownership structures with over

51% of ownership belonging to the founding family. Further investigations revealed that at

the core of the fraud was a fraudulent statement dated over a century old of cash holdings in

the Bank of America by one of the subsidiary companies in the Cayman Islands. The peculiar

nature of this fraud was the ability of a cash deposit which is normally a reviewed and

confirmed fact was overlooked by external auditors Deloitte & Touche and Grant Thorton for

over a decade. The fraud of Parmalat has since become a significant influence in Italy’s and

the world’s focus upon corporate governance policies and auditing measures for

transparency, accuracy and minorit y shareholder protection. As a result of the scandal

Founder, chairman and CEO Calisto Tanzi alongside ten other company members (including

his wife) are under arrest for fraudulent documentation and financial reporting.

At the time of the fraud Enrico Bondi was placed in charge with 180 days to save what he

could of the company. With the Italian Governments support within the industry due to an

existing surplus cash flow, Parmalat was able to survive the bankruptcy and is now trying to

restore its tarnished reputation. Abiding a CSR Policy and corporate governance policy that

is the new Italian benchmark for public companies as well as tighter legal conformity

measures for public companies, particularly focused at transparency and accurate reporting in

pyramid like ownership structures. The Parmalat scandal stirred wide discussion that the

scandal is a reflection of the weaknesses in typical Italian/European corporate governance

and pyramid like organisational structures. However the detail of the investigation has

identified that it could have happened in any international market with the focus on

improving international auditing and accounting standards. As well as laws and regulations to

encourage improved corporate governance standards within public companies, encouraging

pyramid like companies to be more accountable and motivated to deliver performance to the

company and shareholders. Minority shareholders suffered significant investment loss with


Parmalat’s scandal as well as the Italian stock markets reputation for investment

opportunities. Legislations geared towards restricting the ability for key directors and

stakeholders to make self interest decisions is critical to restoring investment confidence in

the Italian stock market, particularly as it is near impossible to manipulate the ownership

structure fairly.

At the time of the scandal the Italian stock market did require a certain level of corporate

governance and format of reporting that had up to then proven sufficient for investor

transparency. On the surface Parmalat did appear to operate with governance and an

acceptable level of social responsibility. Aside of the fraudulent documentation there were a

number of factors that allowed Parmalat to operate dishonestly and deceive auditors and

investors for over a decade to avoid suspicion of the falsely reported documentation. At

surface value there were a number of corporate governance guidelines set by the Italian

Corporate Code of Ethics that Parmalat was adhering to. It was not until further investigation

that the undermining of these ethics were revealed.

The ownership and control structure of Parmalat, typical of many European companies

allowed self interest decision making viable at an executive level. The Tanzi family held

shareholdings across majority of the Parmalat subsidiaries, minimising the overall level of

minority shareholdings in Parmalat. This allowed the Tanzi family to not only control

operations of Parmalat but easily access profits via all the subsidiaries and the controlling

decision of profit disbursement. With Parmalat directly managing over 67 subsidiary

companies, some that were not publicly listed, it was easy to hide the disbursement of profits

for reporting purposes.

The board structure was not in-line with Italy’s code of best practice with an unbalanced

board Directors. It is advised that companies should have a balance of executive and non-

executive directors as well as independent directors for minority shareholder protection.

Parmalat reported a board of 13 members in 2003. Four non executive directors were linked

via family ties, independent directors were previously linked to the company and there of the

seven executive directors three were Tanzi family members. This structure although at

surface level may slip pass, it was clearly undermining the corporate governance guidelines

of Italy and offered little if any protection to minority shareholders.

It is also advised as best code of practice that the Chairperson and CEO positions are held by

separated and independent individuals. In Parmalat’s case both positions were held by Tanzi.


Parmalt’s reporting was accurate for public records, however this position granted Tanzi

significant power and decision influence over the company.

Another area that was exploited by Tanzi was the appointing of Directors and internal control

committee’s over the ten years. There were a number of key recommendations by the Preda

Code (1999, 2002 para.7.2 and para.10.2) that are designed to allow minority shareholders to

have representation and weight at an executive board level as well as in the internal

committees monitoring performance control and internal auditing. In both scenarios Tanzi

digressed from these recommendations and strategic placed family, ex-executive or

independents of close family ties or previous employment into these positions. On paper it

appeared Parmalat was adhering to the Italian code of best practice, under further

investigation it is clear how these loopholes were manipulated for self interest for those

involved in the scandal.

The peculiar nature of the scandal is the fact that such an obvious false document could be

missed by international external auditors. Italy enforces companies to rotate external auditors

every three years, as appointed by the shareholders. It was on the third rotation that suspicion

finally brought the scandal to the surface. It is not implied although investigated that the

auditors were aware of the scandal. It does raise debate that the auditing processes both

internally and externally are not effective enough for recognising or discovering fraud. By

Italian standards Parmalat had maintained standard procedure with auditing processes and as

audited by international auditors there was no reason for suspicion at an international level.

The Parmalat scandal has caused for global discussion around corporate governance,

international accounting standards and independent auditing techniques. Whilst the behaviour

of the Tanzi family and accomplices was scandalous. Their strategy was executed within the

existing framework, abiding many of the measures in place and at surface value it was

convincing. It spanned for over a decade, survived three external auditing representations and

within the eyes of the public and investment market was relatively above board. This raises

severe concern for investment protection, corporate scandal and how to control transparency

and corporate governance without stifling the performance of companies. Italy has since

introduced new corporate governance standards and laws to improve the transparency and

accurate reporting from pyramid like family public companies.


3. CSR Policy Framework

In the decade running up to the revealing of the Parmalat scandal, there was never a defined

Parmalat CSR policy and a poorly documented code of ethics. Parmalat did it’s best to

present their operations publicly to be performing within Italy’s code of best practice as well

presenting as a socially responsible company. However there was no framework to monitor

and make Parmalat accountable to its behaviour. Post scandal it is obvious that it was a

masquerade to avoid suspicion. Since the scandal of 2003 Parmalat has had to readjust its

CSR policy and devote attention to transparency and creating standards of corporate

governance that can attract investor interest. This adjustment has since been used as an

example of Italy’s code of best practice. It is encouraged that all European pyramid structured

companies should refer to Parmalat’s approach as a foundation to their corporate governance

and CSR for a more universal standard throughout Europe. The new approach introduces a

number of company bylaws that target accurate reporting, allocating independent Directors

and monitoring committees and fair representation and protection of minority shareholders.

Parmalat frame their CSR policy around their;

- Mission and Values

- Personnel responsibility

Mission and Values (Appendix A) for Parmalat are the fundamental principles that guide the

culture of the organisation from the top down across every country they operate. It is this

mission and values that creates the foundations for Parmalat to ensure they implement the

appropriate policies and procedures to remain socially, legally and ethically responsible

organisation.

Personnel responsibility is where the key stakeholders within the organisation are responsible

for implementing the code of ethics and how the organisation is to follow the mission and

values and create the culture where they act in this manner day to day.

Parmalat is also bound by the legal system of the countries that they operate in and especially

in their country of origin in Italy where they must adhere to the Italian laws.

Parmalat had re-developed this current code of ethics after their scandal and have used this as

a tool to re-instil this amongst all employees of Parmalat. Code of ethics is important to


organisations to ensure there are clear guidelines for employees to follow, and it is crucial for

these to be demonstrated from the top down. As Tilley, Fredricks, & Hornett (2012) have

found that if leaders of an organisation are not seen living these values day in day out then it

creates a culture amongst staff to not follow these values. This makes it hard to instil a culture

where your employees should be following the correct policies and procedures, as employees

tend to follow their leaders (Lamond, 2008).

It is crucial that even though this mission and values were created that they develop written

policies around these and to ensure that these are effectively communicated throughout the

organisation. Parmalat were not very effective at this constant communicating of the ethics as

many of the senior individuals still chose to break them. Also with the poor reporting

structure through the organisation they were not able to effectively live by these values,

which in turn lead to the poor ethical culture they had.

4. Compliance/Non-compliance to Policy

Parmalat is seen as one of the biggest European business scandals to have ever occurred. As

such there are multiple areas in where Parmalat have failed to comply with their policies and

as well as the law.

There were many individuals involved in this scandal and it demonstrated some of the

individual’s lack of ethics that lead them to not comply with their own policies. Kohlberg’s

theory (Ferrell, Fraedrich & Ferrell, 2011) on why people make the decisions they make is

clearly in action with this scandal.

Kohlberg’s self Interest (Ferrell, Fraedrich & Ferrell, 2011) is demonstrated through the

founder Calisto Tanzi self-interests when managing the organisation. Tanzi actions were

more for personal financial rewards even though Tanzi himself believed he was improving

the organisation at the same time. This is similar to the Benjamin’s personality of the self-

deceiver.

Kohlberg’s conformity (Ferrell, Fraedrich & Ferrell, 2011) demonstrated through the actions

of all the senior managers in manipulating the financial reports to deceive the shareholders

and the public in the results of Parmalat. Organisations have a strong focus on the brand


image and in the Parmalat scandal the senior managers were ensuring that Parmalat still

appeared to the public and investors to be a great organisation to invest in. This was driven by

Tanzi who lead this reckless manipulation and as a result set a culture in that it was

acceptable to bend the rules in the favour of the organisation.

Kohlberg’s principles were clearly identified as being minimally existent to non-existent. If

the self-interest and conformity aspect are negative or illegal then as it flows into the

principles of the individuals, then their behaviour is going to be unacceptable, and the

organisations mission and values are nothing more than just words.

This is also closely reflected in (Ferrell, Fraedrich & Ferrell, 2011) who state there are 3

factors in individuals resolving ethical dilemmas.

1. Recognising the issue as an ethical issue

2. Individual factors

3. Corporate culture

In hindsight it is hard to believe that the individuals involved didn’t recognise that there were

some ethical dilemmas they faced, though the individuals throughout Parmalat in senior

management positions continually chose to break their own code of ethics. It is worse for the

senior managers that knew what was ethically going wrong yet still did not report this. When

you look at the literature that shows the trend and culture of Parmalat (Shaw, 2006,

Fernandes, 2008) it demonstrates it was not an organisation where open communication was

prevalent.

The ethical standards of the individuals in Parmalat are a factor, but the cultural environment

of Parmalat would influence these individual factors and this is demonstrated through Tanzi

and his behaviours and actions.

Parmalat as an organisation with a mission and values in place to ensure that the employees

had some direction on how they should operate in an ethical manner, what let this fall apart

within Parmalat though was the lack of leadership in displaying these values. If the leaders

fail to demonstrate their organisational values on a daily basis it develops a culture in the

organisation that is accepting of poor ethical commitment which in turn can lead to breaking

company ethics (Van Dijken, 2007) but also the law.


As Parmalat had a board of directors that did not comply with the Italian legislation

(Benedetto, Di Castri, 2005), they lacked the ability to have independent external advice and

guidance in ensuring that their organisation were following the values and committing to the

highest standards of corporate governance. As a result Parmalat had broken laws which are a

clear breach in their corporate values. As a result again the Board of directors and senior

management are accountable for this but in the lead up to the scandal breaking out, their

appeared to be no accountability for the poor ethical and law breaking decisions that were

being made.

Another aspect that Parmalat were not compliant to their own CSR was their commitment to

be socially responsible. This non-compliance can have large effects on many different

groups and organisations, and with a company like Parmalat that are involved in almost half

the country’s in the world, this scandal could have had catastrophic impacts (Coburn, 2006).

There was a period where many personal lives were impacted financially due to investing in

the organisation but also in the loss of employment as a result of individual’s unethical

decisions. The Board of Directors have the responsibility to ensure that the organisation is

following their mission and values (Prasad, 2008) and even though senior management

noticed that there were some ethical dilemmas, they kept quiet which also continues to prove

the poor culture that had existed within Parmalat.

5. Legal and Social Consequences

When examining the legal consequences of the Parmalat case we must first identify the main

legal issues that contributed to the fraud. Essentially these are; false accounting, insufficient

disclosure of financial documents and associated supporting material, and the provision of

misleading information to investors (The Economist, 2004).

The fraud was engineered at the highest possible level with Tanzi and Tonna, then Chief

Financial Officer, working together to mislead and deceive. Whilst there was no doubt other

complicit parties the lack of organisational culture, based on defined ethics and governance,

meant that even if suspicious activity was detected, no one felt a responsibility to expose it.

Over 120 individuals were investigated following the scandal with a large number being

formally charged and jailed. This number pales in comparison to the number of shareholders

and bondholders who were financially impacted following the companies bankruptcy. The


impact of the scandal was enormous and lives were indelibly changed for the worse. Most

notably Tonna, who committed suicide in early 2004.

Within Parmalat, false accounting was rampant. Cash assets were significantly overstated and

debts of great magnitude were left unquestioned by auditors. The role of then auditing firm

Grant Thornton has to be questioned and their inability to detect the fraudulent activity has

been the source of much scrutiny. Tonna was able to create fraudulent documents from the

Bank of America overstating the organisations cash assets and then use these documents to

support financial statements.

Essentially the organisations balance sheets where a product of fiction rather than accounting

(ICC Commercial Crime Services). The organisations reported debt was 1.8 billion, however

the actual figure was almost 14 times this. Its turnover was 6.2 billion and not the 7.6 billion

reported. Whilst clearly a serious legal breach in itself, this intentional distortion of the reality

also had severe social consequences amongst the minority stakeholders and bondholders who

had invested their retirement funds in the company. The Italian bond market was also

significantly impacted and it was extremely difficult for Italian companies to issue corporate

bonds in the years following the identification of the fraud.

Whilst the EU has no uniformed accounting standards, which no doubt contributed to much

of the confusion, the presence of such standards may have had little impact particularly when

Tonna was falsifying documentation to support Parmalat’s financial reports. There is no

question that the organisation was operating outside of the law, however its documentation

appeared on the surface to be in order, thus appeasing the auditor’s requirements. As a result,

investors continued to be mislead and invest in the organisation. The market’s regulatory

confines also failed to detect the cancer that was growing within.

One of the main issues contributing to the organisations demise was the absence of any

noticeable governance system. This coupled with the fact that the organisation was primarily

family owned and operated, with a poor organisation culture, created the perfect breeding

group for fraudulent activity and a recipe for a corporate meltdown (Teall, 2009). The

organisation’s non-executive directors, three of them, were all intimately related to Tanzi.

Whilst Parmalat met the non-mandatory requirement of having three non-executive directors

on their board, the individuals selected were essentially part of Tanzi’s extended family and

therefore not independent. This highlights a profound flaw in the establishment of boards and


heightens the need for stronger regulatory requirements and improved transparency during

the vetting process of non-executive directors.

Parmalat raises some good questions around the level of control that individuals (or families)

should be able to have over an organisation. Without independent monitoring or strong

governance, can a primary stakeholder be trusted to act in the interests of the organisation

when there is an alternative that offers personal gain?

The answer, in Parmalats case is no, Tanzi’s motivation was primarily personal gain at the

expense of the organisation and it’s minority shareholders. The Parmalat case ‘proves that no matter how tough the regulator, a management committed to fraud can get away with it’ (Adams, 2004). Even with internal ethical standards and

expectations, Tanzi regularly acted illegally with impunity. With an organisational structure

that was loaded with family interest, Parmalat is the perfect example of governance rotten to

it’s core (Teall, 2009) and thus represented the greatest opportunity for reform.

The organisations ethical framework was extremely weak with internal practises undermining

any basic moral conduct. Over time its culture became one of deception and ignorance and

this is not something that can simply be overcome by improved auditing procedures or a

basic ethical code.

On the surface, the organisation appeared to have a social conscious, in the sense that it was

actively involved in the community through donations and sponsorships and was fulfilling

aspects of its social responsibility. This however was again a misleading trait. The underlying

deception and illegal activity was imploding the organisation, which would eventually file for

bankruptcy.

The outcome from the Parmalat scandal was that many of the key players were charged and

subsequently convicted. Additionally, Italian corporate regulations came under world

scrutiny and this resulted in the inevitable political intervention. Local laws were amended in

an attempt to prevent and detect similar fraud in the future however it has been noted that, in

the case of Parmalat, it was not in fact the laws that were deficient but the enforcement of

existing laws by the Italian authorities (Ferrarini and Giudici, 2005). This was at the time

seen as a knee jerk response to such a complicated web of deception. The Parmalat case

raised the need to review corporate governance practises within the country and set a new

standard for publicly listed companies.


6. Impact of a CSR Policy

Parmalat did not go to the extent of defining their Corporate Social Responsibility in a policy

and this is yet another example of the organisations inability to operate effectively under the

Tanzi regime. If the organisation did have a CSR policy in place it may have gone some way

to addressing the cultural flaws and transparency issues that existed. Additionally, and

perhaps most importantly, the policy could have brought to attention the organisations lack of

governance, which was its primary downfall.

Carroll’s typology of corporate responsibilities states that there are four main types of

responsibilities (Blowfield and Murray, 2011):

1. Discretionary – Desirable but discretionary acts that contribute to social good.

2. Ethical – Ethical expectations of a company

3. Legal – Obligations to fulfil economic missions within the confines of the law

4. Economic – Responsibility to produce goods and services that society wants at a

profit.

In the case of Parmalat the key responsibilities that were not upheld where primarily ethical

and legal. Parmalat failed to conduct business within the confines of the law and the ethical

breaches are numerous. There are many ingredients that make up a CSR policy and whilst

Parmalat had defined its visions and values, there were many other elements that were either

partially or completely absent.

‘Effective corporate governance is essential for long term corporate success’ (Teall, 2009).

The key word is ‘effective’ as there are many examples of governance models that look good

on paper but are ineffective in practise (i.e. Enron). The relationship that exists between the

board and shareholders must be manifested within corporate governance codes (Blowfield

and Murray, 2011) in order to be meaningful.

Around the time of the Parmalat scandal Italy was one of the poorest ranking countries in the

EU when it came to corporate governance and it did not have ‘an efficient system for the

safeguarding of creditors and minority shareholders in the presence of a family corporation’

(Bava & Devalle, 2012). One of the positive aspects to come from this scandal was a renewed


focus on the importance of such governance. The re-emergence of Parmalat under new

direction brought about some critical changes to how the organisation was governed and

managed. The robust governance model that was implemented post-scandal was considered

to be best practice in Italy at the time and indicated a change in attitude towards corporate

social responsibility policies.

Strong leadership and accountability must accompany any successful CSR policy and under

Tanzi, the implementation of any meaningful CSR policy may not have been possible. The

level of control he exerted over the organisation and the corporate ‘family’ hierarchy that

existed at Parmalat would not have been conducive to any form of self-regulation. Tanzi was

not only the leader but also the primary shareholder. Tonna was both the CFO and the leader

of the internal auditing committee. In a structure where unethical individuals are asked to

monitor themselves, more often then not they will continue to protect their own interests first.

‘There are no easy solutions to the problem of dealing with a controlling shareholder’

(D’Orio, 2005) and a CSR policy alone will not resolve this. The accountability and attitude

towards such policy from the key business leaders and stakeholders is critical.

The question of whether the Parmalat scandal was a case of corporate governance gone

wrong or a simple case of fraud is a good one. Parmalat’s responsibility to all of its

shareholders should have been paramount. It wasn’t and there was no awareness of this until

it was too late. If there was a robust effective governance system in place, holding Tanzi et al

to account, then the outcome may have been much different.

It has also raised international concern on the standards of corporate governance, accounting

and financial reporting consistency from nation to nation. With many large companies

holding subsidiaries around the globe it is important that markets and investors have access to

accurate, consistent and transparent information. Parmalat’s lack of CSR policy has exposed

the weakness of external auditing procedures and the need to improve this to an international

standard.


7. Conclusion

The Parmalat scandal is a great example of why corporate governance exists, why we need

Governments to monitor companies and their actions as well as the importance in CSR policy

within companies for shareholder security and market transparency.

In the case of Parmalat self interest, from a position of power motivated illegal activities and

mislead the market and resulted in a scandal that has severely tarnished the reputation of

Parmalat. It has also raised much scepticism on the viability of minority shareholdings in

large pyramid like public companies. Although corporate governance policies and laws can

restrict the likeliness of a repeat of such behaviour, at what point does policy making and

laws begin to hinder the performance of these companies. Measures need to be taken to

encourage such companies to place strong internal CSR policies. Not only ensuring they

behave in an ethical and legal manner, but also encourage transparency and protection to

minority shareholders.

Unethical by a small group should not restrict the parameters of all the other companies.

Although a stronger CSR policy may have prevented such a scandal continuing over such a

long period of time. There is also the need to address the external auditors and their role in

uncovering such scandals. Just because a company is operating within the boundaries of

acceptable corporate governance standards, does not necessarily mean it is operating well or

ethically. The Parmalat scandal could easily have surfaced much earlier had the external

auditor’s thoroughly audited and correctly detected the fraud. Perhaps there needs to be a

stronger focus on auditing process designed to detect early stages of fraud, opposed to

identifying and reporting well established fraudulent practices.

It raises awareness of the inconsistency existing from nation to nation and the impact this has

on investor confidence. Highlighting the importance in developing more consistent

accounting and auditing standards as well corporate governance policies from one nation to

the next. Not only to protect minority shareholder, it also encourages investors to invest

outside of their usual market and economies to grow with their organisation and not just

majority shareholder.

In conclusion, unethical behaviour or self interest in large corporations will always exist at

some point. It is important that nations impose strict levels of corporate governance and


auditing that do not restrict the nature of business but will discourage unethical behaviour and

make individuals, key stakeholders and companies as an entity accountable.


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9. Appendix


the economist (2004) -...

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