TCS Daily

Europe's Enron

By Jeremy Slater - January 29, 2004 12:00 AM

In mid-2001 Brussels was a very smug place, indeed -- some might say insufferably so. Especially if the issue was financial services. For not only was everything going so well for the Financial Services Action Plan, which was a key component of the Lisbon agenda to make the European Union the most successful and "dynamic knowledge-based economy" in the world by 2010, but there were also a lot of claims being made that Enron or Worldcom-style scandals could not happen here.

How times change. First, the EU's ambitious Prospectuses Directive, which would have made cross-border investing easier, was thrown back to the European Commission to redraft by the European Parliament. Then the Takeover Directive, another pro-growth initiative which had been in the institutional pipelines for 12 years, was shot down by a hoary grouping of protectionist German and Dutch MEPs. Suddenly the mood here started to turn a little sour.

They say everything that happens in the US happens in Europe a few years later. And so we have our own financial scandal, and what a scandal it is. The mis-auditing of Italian food conglomerate Parmalat's accounts has been reportedly described by the US Securities and Exchange Commission as "one of the largest and most brazen frauds in history". And this is from an American institution that, unlike many others, does not usually do hyperbole.

The reason for SEC's commentary is that the Parmalat scandal is even bigger than Enron was. Italian investigators say that there is a €10 billion hole in the company's accounts. Its founder Calisto Tanzi, who is now staying at the pleasure of the Italian government in Milan's San Vittore jail, admits that some of this money was used to help his daughter's travel company Parmatour, which was said to be in financial difficulties. Tanzi, who if convicted could receive a sentence of up to 15 years, is rapidly losing any support he had in the company as senior management begin assisting the authorities in the inquiry. Enrico Bondi, Parmalat's newly installed chairman and CEO, allowed Fausto Tonna, the former chief financial officer who quit the company last March, and Gianfranco Bocchi, an internal auditor, to be temporarily released from jail recently so that they could return to their former offices at the company's headquarters. Both agreed to go through any of the remaining files as investigators have discovered that apparently other Parmalat executives had destroyed important company information before the scandal broke last month.

The seriousness of the crisis has already damaged the reputation of other Italian companies as money market traders predict that the cost of the loans to these businesses will have to go up. This threat has spurred on not only the Italian authorities, but the European Union too. For any further scandals could cost all of European business dear. Frits Bolkestein, the internal market commissioner, who through the FSAP has been trying to stamp out these sort of irregularities, earlier this month made an initial presentation to the whole Commission explaining how such scandals could be avoided in future.

He came up with the usual EU laundry list of proposed new regulations He also said that rules governing auditing in the EU would be improved in the soon to be proposed 8th Company Law Directive. Further, at a press conference following the latest meeting of EU finance ministers in Brussels, Bolkestein commented, "After the Enron affair came to light I warned against complacency on this side of the Atlantic. Similar scandals have happened here proving that the present legislation would not solve all problems. Lessons have to be learnt."

He later added, in a rather resigned way, that; "Already strict rules did not work and malpractice took place. Unfortunately rules can be circumvented when people are determined to break the law."

Gloating at financial misdemeanors on either side of the Atlantic is not a positive way in which to create a business environment that halts such criminality. Both Europe and America have now paid the price for some people deciding to break the rules that govern how a company should be properly audited. No matter what the reason was, whether to save their company or just for personal gain, such actions hurt all businesses. To misquote an old management phrase, what is bad for Parmalat is bad for Europe, and the rest of the world too.


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