The Adelphia Communications scandal occurred in March, 2002 when three of the original founding family members which included the father John Rigas, and two of his sons Michael and Timothy, along with two other company executives were arrested for improperly taking assets from the nation’s sixth-largest cable television company. The scam involved one of the biggest financial frauds faced by a publically held company. In the end stakeholders were forced to absorb massive losses as their shares in stocks fell sharply. The Rigas family hid billions of dollars in debts by falsifying its financial records, and blatantly lying to their investors about it.
Adelphia was founded in 1952 by John Rigas and his brother Gus Rigas in Coudersport, Pennsylvania with the purchase of their first cable franchise for $300. After 20 years, the Rigas brothers incorporated their company under the name Adelphia which derived its name from a Greek word which means brothers, an apt corporate title for a business that would employ generations of the Rigas family. Adelphia was a cable television company and built its success on a strong commitment to customer care; and because of this commitment, a glorious growth spree would follow. By 1998, Adelphia passed the two million-customer milestone and served approximately 5.6 million cable television
By the early 2000s, Adelphia was one of the top cable companies in the United States. This was the peak of a corporation that would begin a downward spiral over the first half of 2002 as a result of fraudulent use of the company’s assets at its’ shareholders expense. In March 2002, Adelphia disclosed that it had backed the Rigas family 2.3 Billion dollars in loans over the years. These loans were shifted to unconsolidated affiliates, and Adelphia used sham transactions and fictitious documents to show the loans had been repaid. Rigas Management also manipulated the books to meet analysts’ expectations and inflated the stock price. The family had withdrawn millions of dollars and misused the corporation’s assets to the point that Adelphia was bankrupt.
Several warning signs were eminent before the detection of the scandal, which showed that something was at a mess in the company. This is because of the huge sums of money involved, and the suspicious arrangement the Rigas family made with the company that required the company and the Rigas family to be guarantors of each other. Subsequent investigations revealed that the Rigas family indeed fraudulently obtained billions of dollars from the company for their gain. In this regard, the Rigas family treated the company as their cash machine, where they borrowed a large amount of cash quite often without paying back. Members of the Rigas family drove the company to bankruptcy through rampant spending of company funds on personal expenditures. These expenditures included the likes of gross misuse of the company’s aircraft for personal trips by members of the Rigas family and the construction of a personal golf course on the family’s private land. This was accomplished after careful manipulation of the company’s reported numbers and fabrication of transactions within the company.
Furthermore, they provided advances to Buffalo Sabre which was a separate family business. During the execution of these decisions, the Adelphia’s finances and family funds were put in the same bank account to make personal purchases. The family used the company’s credit line to make all purchases regardless of their purpose. As a result, Rigases faced legal charges which include abusing control, conducting fraudulent fund transfers, wasting the Adelphia’s assets, and bleaching their corporative roles.
However, the Rigas family made sure that their fraudulent act becomes difficult to detect by excluding the amount they siphoned from the consolidated financial statements and the affiliated statement of the financial position of the company. Also, the Rigas family concealed its fraudulent act by inflating the company’s earnings, falsifying operation performance, and blatantly concealing self-dealing to meet the expectations of Wall Street and shareholders. Co-borrowing and self-dealing were commonplace in this time period that resulted in over 2 billion dollars’ worth of debt. All this was done under the nose of shareholders and culminated in an insurmountable debt that would lead the company to bankruptcy and to the imprisonment of multiple members of the Rigas family.
The scandal led to the arrest of the Rigas family, consisting of the 79-year old chief executive John Rigas and Timothy, his son. Consequently, the federal court judge found the two guilties of conspiracy and fraud. Judges also convicted the Rigas family for cheating investors and the public concerning the company.
Key Ethical Issues in the Adelphia Communications Scandal
The Adelphia Communications Scandal is one of the scandals that have raised several ethical questions regarding the management of an organization. The professional code of conduct does require managers and executives to behave ethically. However, this scandal raised two grave ethical questions involving the conduct of both Deloitte, the company, and the Rigas family. The first key ethical question regards the behavior of Deloitte, which was the company’s external auditor. The second ethical question regards the unethical behavior of the Regas family that led to the scandal.
In the first key ethical question, shareholders and the public did trust Deloitte, Adelphia’s external auditor, to be able to detect and report the fraudulent acts perpetrated by the company and Rigas family. However, this was not the case because Deloitte failed to detect the frauds giving the company an unqualified report. However, according to the professional auditing code of conduct, Deloitte’s failure to detect and report the fraud perpetrated by the Regas family is an unethical act. The reason being the AICPA professional code of conduct requires an auditor like Deloitte to act in the interest of the public, a duty it failed to execute.
The auditor’s professional code of conduct expects auditors to be able to detect fraud in a company. Further, the code requires auditors to be vigilant to recognize any fraud that might exist in the company’s books of accounts and financial statements. Therefore, going by the magnitude of the fraud at Adelphia, an individual would expect a professional audit team like Deloitte to have detected the frauds and conspiracy. This is because several warning signs pointed out that something was at a mess, which Deloitte should have taken note of in its verification of the company’s books of accounts.
Therefore, it raises an ethical question of why a large audit firm likes Deloitte would fail to detect fraud of such magnitude. Many expect a large audit firm like Deloitte to have the necessary skills to audit the books of account and express an opinion that serves the interest of the public, a responsibility it failed to adhere to by giving a false audit opinion. Therefore, its failure to detect fraud of such magnitude leaves one wondering whether the company lacked the competence or it was an act of negligence, which is unethical.
The second key ethical problem pertains to Adelphia’s duty for ethical behavior. According to the scandal, we understand that the Rigas family siphoned billions of funds for its gain at the expense of investors. This is because the investigations revealed that Rigas built a golf course worth $12.8 million using money it fraudulently obtained from the company. Also, the investigation revealed that Rigas hid $2 billion it took from the company in the pretense of paying back for his personal use. However, according to the professional code of conduct, executives must refrain from using company profits for personal use. Therefore, it is unethical for the Rigas family to use investors’ money to enrich themselves.
Also, the professional code of conduct expects managers to report the financial situation truly and fairly, whether in debt or not. However, according to the Adelphia Communications scandal, the report indicated that Rigas omitted material facts from the company’s consolidated financial statements and statement of financial position in a bid to conceal its fraudulent act. Rigas omitted even the 2 billion dollars while also inflating the company’s earnings to conceal their acts. This is unethical behavior under the professional code of conduct.
To conclude, Adelphia Communications scandal is one of the most devastating financial frauds that happened in the USA due to unprofessionalism and corruption. Further, the above discussion has portrayed the key ethical problems that were related to this case include professional negligence and corruption.