Adelphia is one of the giant companies that have declined because of fraud perpetrated by its executives. Adelphia was formed in 1952 as a family business and experienced faster growth in the earlier years of its incorporation. Reports indicate that the company had acquired more than one million customers by the year 1998 (Fabrikant par.4). As a result, the corporation included three leading companies, thus, delivering its telecommunication products and services to more than 30 countries. The company was listed as a publicly owned company in 1998, making it mandatory for the company to prepare financial statements for auditing and review.
However, a scandal broke out in 2002 following the auditing of the company’s books of accounts in which the footnote showed that the Rigas family, the founder of the company, and its executives had borrowed over $2 billion from Adelphia. Subsequent scrutiny revealed that the Rigas family had not paid this amount back (Hofmeister and Hamilton par. 2).
Reports indicate that concern was raised when significant changes were made in the company, which allowed Adelphia and the Rigas family to act as guarantors of each other. Investigations revealed that the Rigas family consisting of John Rigas and Timothy Rigas conspired and defrauded the company’s billions of dollars through false misrepresentation. Judges to the case found the Rigas family guilty of fraud and conspiracy, and they were sentenced to 15 years of imprisonment (Fabrikant par.5).
How the fraud occurred
As earlier stated, the Adelphia scandal came into the limelight in 2002 following suspicious dealings within the company. However, according to the findings from the investigations, it came out that the Rigas family committed the fraud systematically (Lieberman par.5). In this regard, one finding showed that Rigases had borrowed $2.53 billion from the company without reflecting it in its books of account.
Investigations showed that the Rigas family and Adelphia made a loan agreement requiring Adelphia to be held responsible in case the Rigases failed to settle their debts. Mark and Frank indicated that the Cash Management system (CMS) gave the Rigases a chance to have personal dealing in the company making it easy for them to siphon large sums of money for their personal use (par.8). However, the Rigases made sure that it was difficult to detect their fraudulent acts due to misrepresenting and omitting certain liabilities and equity from the company’s books of accounts.
The Rigas reportedly inflated the company’s earnings to impress the investors and Wall Street. However, the inflation of the company’s earnings happened to be a strategy meant to conceal the mischief (Fabrikant par.6). In addition, the Rigases falsified the company’s operations performance, deliberately concealing its self-dealing to meet the subscribers’ and Wall Street’s expectations.
The internal control of the company was also in a complete mess making it easy for the Rigases to perpetrate the fraud (Hofmeister and Hamilton par.4). Investigation on the company’s books of accounts showed that earnings from Adelphia’s subsidiaries and those from the Rigas family’s business were all dumped into one account. The fact that all bills had been paid from this account made aggravated the situation. Hofmeister and Hamilton noted that the co-mingling allowed Rigas’ businesses to reflect large profits since it shared a significant portion of its expenses with the shareholders of Adelphia (par.6).
In addition, the Rigases fictitiously doctored the company’s books of accounts, while creating non-existing transactions at the same time. This is evident from the manner the Rigases inflated the subscribers of the company’s cables.
The money secured from Adelphia in the form of the loan was used to purchase land used for the development of a private golf course. In addition, the Rigases used some amount of money to buy private Manhattan apartments. Further, the rest of the money siphoned from the company was advanced to the Buffalo Sabres (Hofmeister and Hamilton par.8).
How the fraud at Adelphia was discovered
A report indicates that the fraud at Adelphia took place despite the company having Deloitte; one of the worlds’ most experienced audit firms, as its external auditor. Deloitte failed to detect fraud and misrepresentations in the company’s books of accounts, which resulted in Deloitte expressing an unqualified report. However, Grant reveals that Adelphia’s officials discovered the actual scandal following the disclosure of unrecorded $2.53 billion debts (par.2). This disclosure led to the conduction of a forensic audit into Adelphia’s books of accounts in an attempt to disclose if Rigas had indeed perpetrated fraud.
The forensic audit revealed several suspicious transactions, some of which were not reflected in the books of account (Grant par.2). For instance, the forensic audit conducted on the company’s books of accounts showed that Rigas had borrowed more than $2 billion from the company for its personal use and did not pay the money back. At the same time, the forensic audit revealed that the Rigases had defrauded the company by stealing money from the company’s cash management system while concealing their acts by inflating the earnings and the number of subscribers. In addition, the forensic audit showed that the Rigases spent the amount they had siphoned from the company for their personal use, such as purchasing a private golf course (Grant par.7).
However, apart from the use of the forensic audit to detect the fraud, it could have been easily detected using other methods. One of such methods could be through establishing a strong internal control system to prevent and detect any form of fraud that may have been perpetrated in the company. The detection of fraud implies that the company needed to create an internal audit team to assist in regular verification of the company’s books of accounts (Goldmann and Kaufman 11).
The fraud could also be detected easily by ensuring that there was a change of roles within the company management (Goldmann and Kaufman 12). The fraud at Adelphia was committed because Rigas had full control of the company’s Cash Management System with no oversight board. The family has been in control of the company’s cash system since its incorporation, making it easy for them to have enormous room to perpetrate fraud the way they wished.
A fraud of such a nature can be detected easily by ensuring that there is an independent auditing team to verify the company’s books of account. According to the international accounting and auditing standards, an auditor has a responsibility to verify the books of account and detect fraud in case of suspicion (Goldmann and Kaufman 15). In this regard, it can be argued that Deloitte failed to adhere to the auditing code of conduct when it presented an unqualified report despite the fraud at the company.
Internal control and/or accounting principles were violated in the fraud
This scandal certainly resulted in a violation of internal control and several accounting principles. Firstly, it is evident that the Rigas family violated the full disclosure principle, which requires a company to report all material facts either in the financial statement or as footnotes. According to the report of the investigation, the Rigases failed to indicate in the financial statement the billions of dollars it borrowed from Adelphia. Investigations revealed that Adelphia borrowed 2.3 billion dollars from Adelphia, which ought to have been reflected in the final accounts, something it failed to do (Pulliam and Solomon par.6).
The fraud also manifests the breach of business separate entity principle, which disallows the mixture of personal business transactions with company transactions. For instance, investigations revealed that the Rigases directed all the Adelphia’s and the Rigas family’s revenues into one central account. This is an absolute violation of the accounting principle of a separate legal entity since it makes it difficult to determine the actual earnings derived from the company’s operations. Sharing the expenses of Rigases personal business with those of Adelphia also amounts to a violation of the separate legal entity principle (Grant par.10).
The Rigas also blatantly violated the internal control principle of maintaining adequate records. From the investigations, it emerged that Rigases did not keep adequate records as required. Instead, the records kept could not reveal the true and fair position of the company since Rigases inflated earnings to impress Wall Street and shareholders. Furthermore, the failure to reflect the loan in the company’s books of accounts amounts to a violation of the internal control principle requiring the maintenance of adequate records (Pulliam and Solomon par.7).
The fraud also resulted in a violation of the internal control principle that requires the performance of regular and independent review of the books of account. Reports from the fraud indicated that the company lacked an internal control department to ensure regular review of the company’s books of accounts. Lack of regular and independent review made it easy for Rigases to defraud the company billions of dollars (Pulliam and Solomon par.9).
Recommendations to prevent a similar fraud from occurring again
Several companies lose billions of dollars due to fraud perpetrated by the company’s chief executives and managers like in Adelphia’s case. As a result, it is crucial for control measures to be instituted to prevent fraud because it may result in the collapse of a company.
A fraud similar to the one experienced at Adelphia can be prevented using several means. First, strong internal controls must be instituted to ensure that financial statements are properly kept and occasionally verified to prevent fraud of any nature. Second, fraud of this nature can be prevented by appointing an experienced independent audit team to verify the financial statements (Wells 6). The existence of an independent audit team will scare away perpetrators of fraud of a similar nature. Third, there should be an occasional rotation of duties within a company to prevent the commission of such fraud (Wells 6). Finally, a company should encourage whistle-blowing by ensuring that whistle-blowers of fraud are provided adequate protection.
The fraud at Adelphia showed the importance of instituting a strong internal control system to prevent its occurrence. In addition, the fraud showed a gross violation of accounting standards that ought to be prevented for the effective running of a corporation.
Fabrikant, Geraldine, “Market place; A Family Affair at Adelphia Communications“. New York Times. 2002: 1-2. Web.
Goldmann, Peter, and Hilton Kaufman. Anti-Fraud Risk and Control Workbook. Hoboken, New Jersey: John Wiley & Sons, 2009. Print.
Grant, Peter. “Rigas Cable Assets Run By Adelphia May Be Seized.” The Wall Street Journal. 2004: n.pag. Web.
Hofmeister, Sallie, and Walter Hamilton. “Adelphia Founder, 2 Sons are charged with Fraud.” Los Angeles Times. 2002: n.pag. Web.
Lieberman, David. “SEC Filing Reveals Rigases’ Use of Adelphia’s Assets.” USA Today 2002: n. pag. USATODAY. Web.
Markon, Jerry and Robert Frank. “Five Adelphia Officials Arrested on Fraud Charges.” The Wall Street Journal 2002: n.pag. online. Web.
Pulliam, Susan and Deborah Solomon. “Adelphia Shareholders Find Things Aren’t Always the Way They Seem”. The Wall Street Journal. 2002: n.pag. online. Web.
Wells, Joseph T. Corporate Fraud Handbook: Prevention and Detection. Hoboken, New Jersey: John Wiley & Sons, 2011. Print.