No one attempted Parmalat jigsaw

Only the Tanzi family and close associates knew how all the pieces fitted together. But the fragmentation of responsibility does not absolve everyone from it - the questions asked should hark back to the whole picture

As the Parmalat scandal unfolds, fascinating detail is emerging about the Italian dairy company's Byzantine structure, hyperactive bond issuance, loss-making acquisitions and lies about its available cash.
These colorful pieces all fit into a jigsaw that only the Tanzi family, Parmalat's principal owners, and its close associates could see. Investors might have guessed that the motives were maintenance of family control - by hanging on to 51 per cent of the equity - and tax avoidance.
Now the main aim looks to have been to cover up losses and funds siphoned off for family purposes. The total amount unaccounted for is estimated at €l0bn (£6.9bn).
One explanation for the failure to spot the malignity is that no one outside the Tanzi camp had a clear view of the whole. Everything was fragmented: the auditing, the banking, the money raising, the investor base, the supervision.
This diversity has one advantage: no bank or investor is likely to suffer catastrophic losses. But it also raises a question about international capital markets
Who should have had a view of the whole? Auditing was split between Grant Thornton, which had served the company for 13 years, and Deloitte, brought in as chief auditor in 1999. Sadly, the rotation did not make the chief auditor responsible for the whole, as is the case in the UK.
That lack of clear prime responsibility may explain why Deloitte failed to act as a new broom - surely the point of rotation. The work of Grant Thornton on key subsidiaries - including the one that faked a €3.95bn bank account - continued without independent verification.
As for the supervision of auditing in Italy, Marco Tronchetti Provera, chief executive of Telecom Italia, was right to call, in an article for the Financial Times last week, for a Public Company Accounting Oversight Board for Italy.
Was there a bank that had a long relationship with Parmalat, understood its cash flow and knew where all its money was? No.
In the past 10 years, some 20 banks - including Chase Manhattan/JP Morgan, Merrill Lynch, IMI (now merged with San Paolo), Intesa and Unicredito - have been involved in nearly 40 bond issues, raising around $9bn.
("Black Hole") as an offshore finance company. Bank of America did not have €3.95bn on deposit for Bonlat, a Cayman island subsidiary. But it did other work. Deutsche Bank, adviser on the last bond issue, got roped into helping Parmalat respond to Standard & Poor's inquiries.
None had an old-fashioned over-arching relationship that might have enabled it to spot the whole. If they had, the cynical view is that they would have got sucked into colluding. It seems to be conventional wisdom in modern capital markets that an arm's length relationship between borrower and lender is less prone to corruption and uncommercial decision-making than the old close bonds between a company and its local bank. But there is a cost in terms of intimate knowledge and prime responsibility.
The strangers that now lend money to companies such as Parmalat, via the bond markets, attach great importance to credit ratings from the likes of Standard & Poor's. But the agency relies on the published accounts and the honesty of the company's leaders.
If a company fails to answer questions, the rating may well be withdrawn; but not if it lies convincingly. Consob, the Italian market regulator, will also have been blinded by the audited accounts, as well as the remoteness of many operations. But weaknesses have been exposed in terms of accounting standards (hence the need for internationally recognised ones), corporate governance and the quality-of monitoring.
Parmalat was also clever in that it operated in several jurisdictions and sought out regulatory havens, such as the Cayman Islands. Other ways in which it kept below the regulatory radar included its avoidance of big share issues. If it had tried to raise €lbn a year on the equity markets, the glaring question "what is it all for?" might have been asked. In the US, it made some private bond placements that did not have to be registered with the Securities and Exchange Commission.
The suits have started to fly from investors and fraud will strengthen their case. But the canny ones are those who looked for the whole picture and when they could not find it, fell back on fundamental questions such as why would a food group need to raise money so often? And why did it behave like an organisation with something to hide?