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Harvard International Law Journal

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Fraudulent accounting, financial reporting, accounting scandal, Parmalat, Sarbanes-Oxley Act, European Court of Justice, ECJ, Silvio Berlusconi, Italian Civil Code


In recent years, the general public in many countries has become increasingly aware of issues concerning business accounting and financial reporting. Americans hardly need to be reminded of the Enron debacle, where members of the company's senior management engaged in fraudulent off-balance sheet transactions to disguise the true state of the company's financial condition, a scheme that auditors failed to uncover until the company's implosion. This and other major corporate governance cases involving questionable or fraudulent accounting practices led to the Sarbanes-Oxley Act of 2002. This law was an unprecedented Congressional intervention into corporate governance, an arena that had previously been left largely to Securities and Exchange Commission ("SEC") rules and professional self-regulation (e.g., auditor independence requirements) or to state corporate law (e.g., requirements for board committees and their composition). Accounting scandals are not, however, a phenomenon limited to the United States. As a result of similar events in some European states, accounting reform has recently appeared on their policy agendas as well. Italy is notable in this regard, due in large part to its home-grown Parmalat scandal-until now Europe's most expensive financial scandal. At the end of 2003, a 14.8 billion gap that had been disguised by the establishment of an offshore subsidiary was discovered in the firm's accounts. Surprisingly-at least at first glance-at a time when other countries were strengthening their stance to- ward accounting fraud, Italy eased the grip of its criminal law on accounting fraud in a 2002 legislative decree amending the Italian Civil Code. The Italian courts have submitted this amendment to the scrutiny of the European Court of Justice ("ECJ") for a preliminary ruling. The objective of this note is to analyze the importance of three joint cases - one of them against the Italian Prime Minister Silvio Berlusconi-where the amendment of Italian law is now at issue, and to situate them within the bigger picture of the current state of corporate governance and financial reporting. Part I explains the legal context of these cases and outlines the opinion submitted by the Advocate General Juliane Kokott.9 Part II analyzes the three most important parts of the Advocate General's opinion in detail: the application of E.U. law on the nondisclosure of accounts to the publication of false accounts, the need for effective enforcement, and the effect of the principle nulla poena sine lege-that there must be neither crime nor punishment without law. The Advocate General recommends that Italy's judges should ignore the new Italian law, which takes a lax view of accounting fraud. On the one hand, this is surprising, as E.U. directives on corporate law and ac- counting do not address the issue at all. On the other hand, this strict approach to financial reporting is in line with increasing efforts toward stronger involvement of the E.U. "federal" level in corporate governance in general, in consideration of recent U.S. corporate governance developments as well as the economic underpinnings of accurate accounting. Part III then addresses the issue of how the Berlusconi case may contribute to an increased effectiveness of E.U. efforts to strengthen and harmonize corporate law.