Outlook: Berlusconi ill-qualified to deal with Parmalat's Italian job

WH Smith chalice; Equity withdrawal

The Parmalat affair is a wake-up call for a country whose business practices have for too long remained mired in almost medieval standards of accountability and probity, but it's not clear it has any implications of significance outside Italy's borders. By common agreement, Italy is one of the least transparent and most corrupt countries in Europe. According to a recent survey by Transparency International, which monitors levels of corruption in more than 100 countries, even nations as underdeveloped as Botswana, Uruguay and Slovenia are thought less corrupt than Italy. Among European Union member states, only Greece comes further down the league table.

In this regard, the scandal of Parmalat, a company most of us had only vaguely heard of before last month's extraordinary revelations, shouldn't come as much of a surprise. If you'd been asked to identify where Europe's Enron might happen, Italy would have been at the top of most people's list.

The respectable face of Italian business has long portrayed Italy as a country of two halves - the corrupt and still undeveloped south, and the more Westernised and prosperous north. Parmalat, based in Parma, and answerable to the financial regulators of Milan, hardly confirms the distinction.

The US Securities and Exchange Commission (SEC) has described Parmalat as "one of the largest and most brazen corporate frauds in history". For once, the US regulator isn't exaggerating. This was not a financial fraud of the complex and hard to understand variety, like Guinness, where the mischief was in the attempt artificially to ramp the share price, or even Enron, where the market was misled over the company's true state of the affairs, although it was both those things too.

Rather, it was a straight fingers in the till job, much more like Maxwell or Barlow Clowes. Calisto Tanzi, the founder, could scarcely have been more blatant about it had he marched out of his offices with a bag over his shoulder marked "swag".

As details emerge of how the money was stolen, and the botched efforts that were made to cover up the consequent black hole in the accounts, the affair looks almost laughable in its simplicity and audacity. As the storm clouds gathered, one head office accountant was told that a weekend of document shredding was no longer sufficient to deal with prying investigators. "Hit the laptop with a hammer," the finance director, Luciano Del Soldato, instructed him.

Parmalat obviously poses serious questions about the application of accounting and oversight standards, both by the company's main auditor, Deloitte & Touche, and the firm charged with auditing some key subsidiary accounts, Grant Thornton. Plainly, there were some horrendous failings. For its part, Grant Thornton claims to have been duped along with everyone else. The evidence pouring out of the Milan prosecutor's office might suggest otherwise but, whatever the truth, it's hard to avoid the conclusion that the Italian definition of acceptable standards of accounting vigilance and probity is a good sight looser than everybody else's.

The old joke has it that in Italy there are three sets of accounts: one for outside consumption, one for the tax man, and one locked away in a drawer somewhere which tells you what's really going on. Parmalat shows that this clichéd view of Italy is closer the truth than any of us could have imagined.

Never say never, but it seems unlikely that Parmalat could have happened in Britain, where post the accounting scandals of the late 1980s and early 1990s, standards have been re-written and more rigorously applied. As a consequence, the last downturn threw up plenty of examples in Britain of incompetence and overstretched balance sheets, but no substantial case of outright fraud, the usual bedfellow of an economic bust.

The Parmalat scandal has already prompted calls for another lorry load of European-wide oversight and accounting regulation, and even, in some quarters, for the setting up of a European financial regulator along the lines of the SEC in the US. Both responses would be unfortunate, for despite the fact that the financial scandal of the last downturn has not been confined to Italy - Holland has had Ahold and France, Vivendi Universal - Parmalat seems to be a uniquely Italian affair with few lessons for those engaged in business and oversight elsewhere.

Parmalat is Italy's shame and Italy's problem to fix - no one else's. The damage is all too likely to be lasting, with investors and lenders already talking of the need for an Italian discount to take account of the risk of fraud. Whether it is possible for a country led by a businessman who has himself been charged with corruption, and who recently reduced the penalties for false accounting, to undertake the necessary reform, remains to be seen.

WH Smith chalice

Kate Swann, chief executive of WH Smith, is still new enough in the job to be able to blame yesterday's calamitous profits warning on her predecessors. True, most of the damage seems to have occurred during the group's crucial pre-Christmas trading period, which was after Ms Swann arrived, but she can hardly be held to account for stock and promotional decisions that would have been taken months previously.

None the less, if Ms Swann didn't fully grasp the nature of the challenge she was taking on when she joined, she certainly will have done now. WH Smith seems almost wholly to have miscalculated this Christmas. Its promotions served only to confuse, and its stock of Christmas gifts failed to excite. By taking up the front end of the store, the Christmas "goodies" seem to have damaged sales of old reliables, such as cards and stationery, which were confined to the back.

A very substantial proportion of this stock will now have to be sold off at deep discounts, necessitating a big write-down against profits. Meanwhile, the dividend looks almost certain to be cut. None of this would have surprised anyone who saw the company's pre-Christmas TV advertising campaign, which is a struggle to recall at all. It was about as inspiring as a wet Sunday afternoon.

Which rather sums up WH Smith's problem. The format is old and unattractive, and the mix and match approach to retailing - a bewildering clutter of CDs, books, gifts and stationary alongside the traditional newsagent - is neither fish nor fowl. Caught in a pincer movement between the big supermarket groups on the one hand, and more fast moving, specialist retailers on the other, WH Smith is still struggling to find a plausible raison d'être.

Ms Swann promises some easily achieved emergency therapy. Head office costs are to be cut and the company infused with "the retail basics". There's also retribution. Beverly Hodson, the woman who was famously given a £100,000 bonus for the distress of being passed over for the chief executive's job, has been fired as managing director of the core UK retail operation. Yet there's no mention of the hard part, which is how on earth to breathe new life into this bombed-out old newsagent and give it a reason to exist. If she can crack that one, then she'll for ever be known as a retailing genius.

Equity withdrawal

Equity withdrawal rose to the near record level of 7 per cent of disposable income in the third quarter of this year, according to figures published yesterday by the Bank of England. There are plenty of reasons for believing the housing market is about to come off the boil, but this is perhaps not one of them. The biggest growth in equity withdrawal is among the elderly, keen to spend or gift away some of the upside in the housing market before the tax man can lay his hands on it through inheritance tax. It is possible, then, that unlike in previous cycles, equity withdrawal will remain at a relatively high level, whatever happens to house prices.

jeremy.warner@independent.co.uk