Accounting Ethic Case Study: Adelphia Communications Corporation

Case analysis 3

Chao Yao

Major case 1 Adelphia Communications Corporation

1. What are the facts?

In September 2005, the SEC charged Dearlove, a certified public accountant and formerly a partner with the accounting firm Deloitte& Touche LLP, with the improper conduct resulting in a violation of applicable professional standards. On July 24, 2009, the U.S. Court of Appeals for the District of Columbia supported the finding of the SEC that Dearlove engaged improper professional conduct. SEC found that Adelphia’s financial statements were not in accordance with the general accepted accounting principles and Dearlove violated general accepted auditing standards. The Adelphia communications Corporation was one of the largest cable television companies in the United States. Prior to 2000, the SEC found large amount Co-borrowed debt inside the company and its affiliated entities. After the big Enron scandal, SEC required public company to disclose the related-party transactions. As Adelphia disclosed its obligations as co-debtor with the Rigas entities, the stoke price of company declined sharply and finally was delisted from the NASDAQ.

1. What are the ethical issues?

Dearlove had engaged in unreasonable conduct, such as approval of the Adelphia’s method of accounting for related-party transactions. His behaviors resulted in a violation of applicable professional standards. Deloitte, who engaged in auditing Adelphia, did not issued a fair auditor’s report. Adelphia violated the accounting and reporting standard, such as improper offsetting receivables and payables, improper disclosure of its co-borrowed debt and adequacy of the note disclosure of Adelphia’s contingent liability and hiding debt from Adelphia to Rigas entities.

1. What are the norms, principles, and values?

Adelphia’s financial statements were not in accordance with the general accepted accounting principles and Dearlove violated general accepted auditing standards. Adelphia violate the accounting and reporting standards in their accounting book record.

1. What are the alternative courses of action?

1. Dearlove should be more professional and skeptical to the “higher than normal risk” of Adelphia and take more extensive supervision by the auditor with final responsibility for the engagement during both the planning and conduct of the engagement.
2. Adelphia management should take suggestion made by auditor manager Ivan Hofmann and others to disclose the specific dollar amount of Rigas entities’ co-borrowings instead of continually ignored Deloitte’s suggestions.
3. Deloitte should communicated with audit committee of the company or the board of the directors. If both of those are indifferent to the problem, the auditing firm should report the fraud to the SEC.
4. Dearlove and Deloitte just engaged in the auditing service and continually approve the improper accounting method used by Adelphia.

1. What is the best course of action?

The third one is the best course.

1. What are the consequences of each possible course of action?

1. Dearlove may not violate the GAAS if he increase his professional care and skepticism, as when Deloitte present a high risk of existing of material misstatement or fraud.
2. Company will correct their accounting treatment as soon as possible and make a fair financial statement and disclose proper and adequacy information to creditors, shareholders, regulators and customers. Company may prevent from inappropriate accounting in related party transactions and keep it from destroying the reputation and bankrupt finally.
3. Deloitte would not be charged by SEC if they tried to solving or reporting the disclosure problem and accounting fraud existing in Adelphia as soon as they notified.
4. Financial information of Adelphia still be distorted by corporation and auditors still not tailor their examinations to obtain satisfaction concerning the purpose, nature, and the extent of those transactions on the financial statement.

1. What is the decision?

From the perspective of the corporation, it should enhance its supervision to management level from the board of directors and internal control system. From the auditing firm and auditor partner’s perspective, they should be professional skepticism in auditing procedure and make sufficiently understand of its client to complete their auditing service.