RiskFinancial CrimeCould Parmalat Have Been Prevented?

Could Parmalat Have Been Prevented?

With yet another scandal rocking the finance industry, questions are being
raised about how to prevent corporate fraud. Naturally, the immediate focus
is being placed on who is to blame. Once the dust has settled however, the emphasis
will be on the regulation or even legislation, required to avoid such scandals
in the future. That there will be increase in control is certain, but there
is serious debate about the form this will take. Some are calling for a Sarbanes-Oxley
for Europe, while others are sceptical of the viability of pan-European regulation.

No matter how far the controls go, one thing is for certain, CEOs and CFOs
are going to become increasingly accountable for the actions of the organizations
they govern. However, without control and visibility across their operations,
how can any senior manager feel comfortable about assuming an increased level
of responsibility and personal risk if things go wrong?

Excel still the technology of choice

The vast majority of corporates have been slow to embrace the concept of centralized
treasury operations and technology. It is remarkable that the Excel spreadsheet
is still the solution of choice for these treasury operations. Couple this with
the fact that treasury operations are often dispersed across subsidiary operations
in multiple global locations and one has to wonder how many treasurers can sleep
at night.

Without visibility and control, any corporate is going to struggle to protect
itself from fraud. As cases such as Enron, Ahold, Worldcom and now Parmalat
have demonstrated, companies and their stakeholders need to be able to avail
themselves from fraud at all levels. When fraud is embarked upon from the top
down, as was the case with Parmalat, prevention can be a difficult task. Fraud
from the bottom up, though, is a different story and easily preventable as long
as organisations have the right technology, procedures and checks in place.

The risks of a manual operation

Take Royal Ahold, the Dutch supermarket chain, which improperly booked $1.1billion
in profit. US Foodservice, A US-based subsidiary of Ahold was found responsible
for the fraud. Had Ahold had a centralized, integrated cash and treasury management
solution in place, it would have been very difficult, if not impossible, for
Ahold’s employees to embark upon such activity.

What the Ahold case demonstrates is that it is imperative that a parent company
has true visibility on the actions of its subsidiaries. By simply comparing
cash flows against the P&L, a parent company or central treasury is far
better equipped to detect the kind of fraud that was committed at Ahold. However,
this is easier said than done. Take the manual, Excel-based set-up of a large
number of corporates and suddenly fraudulent activity is easy to hide. If spreadsheets
depicting these figures are simply being sent to central treasury by the subsidiaries,
how can central treasury guarantee that the information they are receiving is
actually correct?

Real-time visibility and control

Reports say that the analysts reviewing Ahold should have been focussing on
cash flows and not earnings as earnings are easily manipulated. Had Ahold had
a centralized cash and treasury management solution in place, it would not have
required the auditors to detect the fraud. By taking feeds from ERP systems
and interfacing to external bank accounts, a centralized cash and treasury management
system can deliver complete visibility of true cash flows in real-time, enabling
discrepancies to be immediately identified. Without this level of control, central
treasury is simply at the mercy of its subsidiaries.

Local empowerment, central control

A Web-based centralized cash and treasury management solution enables subsidiaries
to retain control over local operations and maintain local bank relationships,
while, at the same time giving those who need it, from treasury managers, CFOs
and CEOs right through to external auditors, complete visibility over the business
at any time and in real-time.

Another benefit of undertaking a global system rollout is that it enables a
corporate to review its procedures. Often central treasury is unclear as to
how many bank accounts are held across the operation, who is able to authorise
what and how much. Any system implementation project will force organizations
to revisit this, often resulting in a streamlining of procedures, number of
external bank accounts and perhaps crucially greater control over who can authorise
payments.

Building the business case

Despite the obvious benefits, many treasury managers face difficulties building
a strong business case for technology, as most of the benefits are realized
at subsidiary level, making buy-in at senior management and Board level difficult
to achieve. Where purchase decisions have been made, they have generally resulted
from a business need other than fraud avoidance, such as the creation of a payment
factory or an in-house bank. An increasing focus on corporate governance issues
is causing the audit manager to be increasingly involved in the purchase decision,
which is helping to increase the demand for effective controls. However, in
the vast majority of cases, these controls are seen as little more than an added
bonus.

Bringing corporate governance to the fore

It is clear that technology has its place in improving corporate governance
and avoiding future corporate frauds. The question is though, how many scandals
does it take before corporates start placing corporate governance at the fore
and stop simply viewing it as a nice by-product? Unfortunately, it seems that
the only way this will be achieved across the industry will be as result of
increased regulation. As Karel Lanno, Chief Executive of the Centre for European
Policy Studies (CEPS) in Brussels said in response to the Parmalat scandal:
“Like Enron, these events give regulators more power.”[1]

European scepticism

That said, if the results of a recent survey conduced by GTNews are anything
to go by, an increase in regulation is likely to be a slow process in Europe.
Only 48% of Western European respondents agreed that other jurisdictions should
adopt similar regulations to Sarbanes-Oxley. Conversely, in Asia and the US,
it was felt that Sarbanes-Oxley should be implemented in non-US jurisdictions.
Hopefully Parmalat will alter the European scepticism that is currently out
of line with the rest of the world.

A strategic technology view

Now is the time for treasurers and CFOs to think strategically and really harness
the benefits that technology can bring. European companies listed in the US,
have been quick to raise their objections to the fact that they too have to
comply with Sarbanes-Oxley. Yes compliance is likely to be costly, but on the
flipside, if these companies took a strategic view, and made their systems selection
correctly, while tackling Sarbanes-Oxley, they could also benefit from compliance
with current regulations including IAS39, and future regulation.

So could Parmalat have been prevented? The answer unfortunately is probably
not, as it seems the most senior decision makers and even the external auditors
were implicated. Having the right technology and processes in place though,
would have made it less likely that Parmalat would have got away with so much
for so long and could have prevented other frauds, embarked on from the bottom
up, such as Ahold. What we now have to hope is that the industry learns from
the mistakes of others and embraces the benefits that strategic technology can
bring.

[1] Financial News, 19-25 January 2004

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