Adelphia Communications Corporation – Fraud Case In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users. History: In 1952, John Rigas paid $100 for a cable TV franchise in Pennsylvania and ran it as a small family business with only 25 customers. (Bennett, Thau, Scouten, 2005) The business was expanding and in 1972, the company was officially incorporated as Adelphia Communications Corporation. Shortly after, in 1986, Adelphia started publicly trading on the NASDAQ stock exchange. In the 1990s, in the light of a weakening cable industry, Adelphia began expanding into Internet access, paging services and business telecommunications for which it used cash, stock and debt to finance numerous acquisitions. (Bennett, et al) Adelphia’s fraud was finally discovered in March 2002, when Tim Rigas, the company’s CFO revealed that Adelphia owes $2.3 billion in loans made to partnerships run by the Rigas family. This revelation resulted in SEC’s investigation that discovered fraud activities which dated as far back as mid-1999. Shortly after, all members of Rigas family resigned from Adelphia. When Adelphia’s fraud was finally discovered, in March 2002, the price of its stock went from $28 to 79 cents within a month. (Bennett, et al) Fraud ... ... middle of paper ... ... and settled the charges by paying $50 million. Although charges and wrongdoings of Deloitte auditors were never proven in court, it is quite apparent that Deloitte indeed had its share of guilt in Adelphia’s fraud. In particular, Deloitte failed to properly investigate the relationship between Rigas family and Adelphia Communications Corporation, thus providing way for fraud to take place. Moreover, Deloitte’s independence in this engagement is questionable, considering Deloitte has been the external auditor of Adelphia for over 15 years. Therefore, auditors, as crucial players and gatekeepers of any company’s financial reporting, should maintain unsurpassed independence, in fact and in appearance, as much as possible. Moreover, as effective and responsible professionals, auditors should always maintain their integrity despite any management or executive pressure.
John Rigas started Adelphia Communcations in 1952 with the help of two partners, but soon bought it out. The company was taken public in 1986 and as a result would have to abide by the regulations of the SEC. 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. Members of the Rigas family drove the company to bankruptcy through rampant spending of company funds on personal expenditures (Barlaup, 2009). 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 (Markon, 2002). This was accomplished after careful manipulation of the company’s reported numbers and fabrication of transactions within the company. 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 (Barlaup, 2009).
Throughout the years, the news covered stories of corporate scandals involving accounting unethical practices. These unethical corporate acts had a tremendous negative impact on these company’s stockholders, investors, employees and the whole U.S. economy. Most of these scandals would have been prevented, if the independent audits of these companies were conducted in an ethical manner. With this in mind, two corporate scandals will be the subjects of further review to understand that an auditor might encounter ethical dilemmas, if independence and objectivity are not part of the audit process.
Rob Hall’s Adventure Consultants and Scott Fischer’s Mountain Madness consisted of four guides, sixteen clients, and a number of Sherpas who together formed the groups with the goal of climbing to the Summit of Mount Everest. Every group member had an individual personal motivator for climbing Mount Everest. Some were wealthy individuals and paid thousands to check the climb off their bucket list, others joined the groups to record the experience in their respective travel magazines, while the leaders Hall and Fischer previously reached the Summit and wanted to increase the number of clients they led to the top. The members were not interdependent of one another in completing the task. Each member could have climbed the mountain individually, but decided to join the groups with one common goal to reach the Summit. Their task force groups were temporary as they would only last until the members returned from climbing the mountain. The Adventure Consultants and Mountain Madness witnessed positive and negative effects of their groups’ formation throughout their time on the mountain.
The affects of a declining economy predominantly affect inherent risk of the audit risk model because of the attraction to either inflate revenues or under report expenses to keep the company in a positive financial standing. Many high-tech related company’s experienced a devastating blow to their financials after the technology bubble burst of 2000, which was marked by two large fraud scandals. First, was Lucent Technologies Inc, a communication equipment provider, which began to inflate revenue of $1.2 billion after management became overwhelmed from the significant decrease in telecommunication equipment spending (Belson, 2004 para. 1). Included in the scheme was $125 of false sales to Winstar Communication (Belson, 2004 para. 1). Second, was MCI WorldCom, a long distance phone company, whose executives under reported its expenses between 2000 and 2002. The executives hid expenses by booking operating costs as capital investments, causing their cash flow to be overstated by over $3.8 billion (Romero & Berenson, 2002 para. 7).
Over the years fraudulent financial reporting has increased the concern of the reliability of the US financial reporting practice. It also call into question the roles of auditors, regulators, and analysts in financial reporting. It is well known that frauds affect the fraudsters, auditors, and investors; however it can also affect citizens, industries, and financial markets, while also manipulating both accounting and auditing standards.
Financial statement fraud is one of the biggest types of fraud in today’s business world. The complexity and mechanism of financial statement fraud brought the attention of auditors and regulators. Financial scandals of Enron, WorldCom, Xerox, Tyco, Parmalat, Qwest, and Satam Computers increased the auditors’ responsibility in detecting and preventing fraudulent transactions. Corporate financial fraud had negative consequences for the market capitalization due to gigantic losses of investors. In addition, accounting scandals of early 2000th ruined auditors’ reputation and the public trust.
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents after finding out Enron Company was going to be audited. The exorbitant amounts of money auditors get paid to hide audit discrepancies was also beyond belief. The article went on to explain many companies hire relatives or friends to do their audits, resulting in fraud, money embezzlement, corruption and even the demise of companies. Resulting in the public losing faith in the accounting profession, the Sarbanes-Oxley Act passed in 2002 by congress was designed to restrict what company owners and auditors can and cannot do. From what I gathered in the article, ever since the implementation of the Sarbanes- Oxley Act there has been somewhat of an improvement but questions are still being asked as to why there are still issues that are not being targeted in hopes of preventing more audit failures. The article also talked about four common causes of audit failure: unintentional auditor mistakes, fraud, fatigue and auditor client relationships. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct clearly states an independent auditor because it produces a credible audit, however, when there is conflict of interest, the relation of a former employer, or a relative or even the fear of getting fire...
Kaplan, R. S., & Kiron, D. (2007). Accounting Fraud at WorldCom. Boston: Harvard Business School Publishing.
The Adelphia Communications Scandal in 2002 dominated the corporate mainstream when the company’s management prepared financial statements that failed to represent the economic reality of the company by excluding billions of dollars of debt. The Securities and Exchange Commission (SEC) calls the case “one of the most extensive financial frauds ever to take place at a public company” (Markon & Frank, 2002). At the center of the case is John Rigas, the founder, former chairman, chief executive of the company and the patriarch of the Rigas family. Also arrested are his sons, Timothy and Michael, both former executive board members, James R. Brown, former Vice President of Finance, and Michael C. Mulcahey, former Director of Internal Reporting. The lawsuit filed by th...
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The fraudulent financial reporting is the information in financial statement that will misleading, omission, and misrepresenting the users in order to attract potential investors and fulfil the shareholder’s expectation wealth. The company may has intended to use wrongly the accounting principle which related to classification, method of depreciation,
Financial analysts and customers were shocked to hear that WorldCom had filed for bankruptcy and subsequently announcing that it made an accounting error in the amount of $3.8 billion. What’s more,...
Steady increase of earnings attracted many investors and entrepreneurs. However, everything has changed. Eventually the growth rate started decreasing gradually. Many company in the industry had to report losses like the closest competitor of WorldCom Inc., AT&T Corp. Despite of such situation, WorldCom continued to surprise the market reporting profit in 2001. Taking in consideration of nature of this industry, it is logical to assume, this market bears a great risk. The market was crowded and highly competitive. In addition, technologies are developed very rapid, new innovations are replacing old ones. The development of internet pushes huge corporations out t heir niches of the market. For external auditor is crucial to look at overall picture. In case with WorldCom, auditors should raise awareness and investigate the reason of such remarkable performance, when everyone goes down. They should take a closer look what is going on. Is it successful launch of new service or product, outstanding business strategy or earning management? Unfortunately, in WorldCom’s case external auditors failed to exercise their professional
Within Adelphia, there were assessments in regards to the company being over-leveraged. While knowing this, the Rigas family continued to work together and cover their tracks “to conceal the borrowings and inflate earnings” (Markon and Frank); rather than combating such issue of leveraging resulting in the fall of stock prices from the recession- in the late 1990s and early 2000s. Additionally, it seemed that employees and management of the company were ignorant to the fact of Adelphia being susceptible to such fraud. While many employees continued to add on to the fraud that the Rigas were committing, management did nothing to be able to stop such activity. They did not consider such activity or have controls set in place to detect such