Accounting Fraud Case Analysis - Adelphia Communications

FRAUD CASE ANALYSIS

Adelphia Communications, Inc.

In 2005, founder of cable giant Adelphia Communications, John Rigas, along with two of his sons who served as CFO and EVP of the company were sentenced to prison terms for a list of crimes related to internal corruption. The company, one of the largest cable providers in the nation, was delisted from the NASDAQ in 2002, forced to file bankruptcy, and eventually sell off all its assets to competitors (Wikipedia, 2011). The fraud at Adelphia was largely perpetrated by members of the Rigas family, who held a majority of Adelphia's voting stock. Over the course of three years, the Rigas family concealed $2.6 billion in debt, falsified earnings, and operational statistics to keep the stock price high, inflated revenues through bogus transactions, and used $241 million to pay personal expenses (Johnson & Rudolph, 2007). The family was able to do this in a myriad of ways, from comingling personal and company accounts, creating separate entities to shield debt, and allowing personal loans on company credit (AICPA.org, 2011). The scandal that brought down Adelphia was the result of personal greed, but was enabled by fraudulent accounting practices, poor internal controls, and a lack of proper auditor review (Johnson & Rudolph, 2007).

The company's Cash Management System (CMS) which held cash for Adelphia, all of its subsidiaries, and additional non-cable related entities owned by the Rigas family was critical to the success of this fraud and central to the duplicitous accounting scheme. Too many individuals had access to this account to withdraw money, and the complexity of one account holding cash for almost 50 entities aided the Rigas family in hiding debt and unapproved withdrawals (Johnson & Rudolph, 2007). In addition, critical internal controls which could have prevented this cash management deception were absent at Adelphia, leading to the conclusion that poor corporate governance led to this lack of oversight (McLean & Elkind). Remarkably, five of Adelphia's nine board members were part of the Rigas family. While not illegal, this can be a conflict of interest. Lastly, even with the falsified accounting data and mismanagement, the firm's auditor, Deloitte & Touche, should have discovered the hidden debt and falsified earnings. The SEC maintained that "Deloitte was not deceived in this case" and further that "Deloitte just didn't do its job" (SEC, 2005).

Deloitte eventually paid a fine for "improper conduct in failing to detect fraud when reviewing Adelphia's books" (SEC, 2005). As part of the settlement, the SEC issued an administrative order requiring Deloitte to enhance its "process for analyzing potentially risky aspects of an audit" (SEC 2005). The Rigas family abused its positions and stacked the board of directors