Analysis: Enron-Parmalat

ENRON The objective of this study is to answer the questions of: (1) In what ways did the failures by the auditors and other gatekeepers contribute to the failures of Parmalat and Enron? (2) In what manner could it be ascribed to the corporate vulture and lack of ethics from a global perspective? (3) What lessons can be learned from the failures by the gatekeepers that might prevent failures of other companies in the future? And (4) What insights can you derive from the films and links regarding the causation of these scandals? Enron In the case of Enron, the company was so overwhelming successful and in essence did business with all other companies, that no one thought to question the company.

The company was filled with former nerds who wanted to make a name for themselves and who were willing to do anything it took to make it and to make money. There was an overall lack of ethics in Enron's company with individuals being encouraged to make as much money in whatever way that they could make it for the company. Quite simply, ethics did not play a part in the methods used by Enron to make money.

As noted in the book "Enron, the Smartest Guys In the Room," the employees at Enron were held to be so much smarter in the world of corporate finance than anyone else that their methods and their balance sheet was for a very long time unquestioned. However, when Bethany McLean, a reporter for Fortune Magazine, and who had a background working at Goldman Sachs examined the balance sheet of Enron, a lot of questions began to surface. In March 2001, McLean noted that the financial statements of Enron were almost impenetrable.

It is stated in a CNN report "Remember when it seemed outrageous to suggest that Enron shouldn't be the golden child of Wall Street? Before the congressional hearings, before Arthur Andersen was indicted, before the SEC and DOJ got involved. Fortune's Bethany McLean asked whether a company that traded at 55 times earnings should be so opaque." (CNN 2006, p.1) Stated specifically by McLean was "It's in a bunch of complex businesses. Its financial statements are nearly impenetrable.

So why is Enron trading at such a huge multiple?" (McLean, 2001, cited in CNN, 2006, p. 1) II. Parmalat Heller (2003) write for Forbes magazine that the Parmalat situation was labeled by the largest part of the Anglophone media world has as "a European Enron" and states that this "Sounds reasonable: Billions of dollars may have gone missing from the company's accounts But the truth is that the Enron pattern -- off-balance-sheet investing in glamorous Caribbean tax havens, private deals involving management -- is an old Italian custom.

Parmalat is reminiscent of several other florid Italian scandals, especially the Banco Ambrosiano affair." (Heller, 2003, p. 1) The deceptions of Parmalat include "a phony letter, purportedly from Bank of America, that alleges the existence of a fictitious $3.9 billion account. Banco Ambrosiano's chairman, Roberto Calvi (he's the chap who wound up hanging under Blackfriar's Bridge), was in the same spot as was Parmalat's Callisto Tanzi. Both were trying to keep creditors away from a fraudulent balance sheet.

In Calvi's case, the bank's money had been invested in a series of offshore New World companies and funds. That money had disappeared into a global black hole. This is, of course, exactly the Enron-Parmalat pattern: receivables from subsidiaries, offshore businesses and funds are carried as assets on the balance sheet, thus quieting the fears of the markets. No worries if a cash crunch develops; there's money in the Caymans, Panama or wherever." (Heller, 2003, p. 1) However, the alleged money simply was not there and a real cash crunch did result.

It appears that Calvi was able to stay away from pressure when the Vatican Bank was somehow moved to write some letter of guarantee however these are reported to have been "legally meaningless but impressive in terms of investor confidence, asserting that the investments were real and the funds could be retrieved. His technique was perhaps a bit more sophisticated than that of Tanzi and his Parmalat managers -- at least the Vatican Bank letters weren't forgeries. But the fraudulent effect was the same" (Heller, 2003, p.

1) It is reported that the Parmalat empire had been on shaking ground for some times. When the economy in Italy that was visible due to being approximately 75% owned by the state began in the 1980s to privatize companies that were public it is reported that "shadowy but mysteriously well-funded entrepreneurs were able to guy good businesses in a less than open process." (Heller, 2003, p.

1) Parlamat went from producing milk locally turning into a national power at the time that the local dairies were privatized by the Italian local governments and at this time they were purchased "one after another, and many who watched the process wondered about the sources of his financing." (Heller, 2003, p. 1) III. Analysis To understand how Parmalat got away with its practices so long it is necessary to understand the Italian regulatory process.

Heller states "CONSOB, the securities exchange regulatory agency, is a toothless tiger -- underfinanced, powerless and in a continual war with the Bank of Italy. Milan Borsa regulation is perfunctory. Local accounting rules and practices, which look strong on paper, are weakly enforced. And, alas, official corruption is endemic." (2003, p. 1) This too was the problem in the United States with Enron because as noted by McLean the SEC is very busy and overloaded and simply does not have time to check everything closely.

Enron was so well-connected and played its cards so well, that no one thought to question them. Both Enron and Parmalat covered their tracks with creative bookkeeping and financing. Investors were coming out so well on their investments that they felt no need to question these companies. When Lay and Skilling were questioned about their balance sheets they were dismissive and at one point Skilling was even insulting to those asking the questions losing his temper which according to McLean was unheard of in corporate America relations.