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.
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)
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... 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.