Research Project on Adelphia
Course # 6200 : 320
Section # 800
Adelphia Communications Corporation was a cable company, whose owners, John Rigas and his son Timothy,” were charged with bank fraud, securities fraud, and conspiracy.” (Reference #4) They were charged with all fifteen accounts of securities fraud. Another son of his was acquitted, as well as the former treasurer, Michael Mulcahey. “John and Timothy now face 30 years in prison because of the bank fraud charge.” (Reference #4) “They were charged with hiding over $2.3 billion dollars’ worth of debt in the company,” (Reference #4) as well as stealing from there investors. John became so greedy with the money he was taking, that his son became worried about it and tried to limit him to only taking out one million a month. The prosecution had two witnesses that they used in order to bring down the Rigas’, and they were Adelphia executives, James Brown and Karen Crosniak. They testified and tried to say that they weren’t aware of what they were doing, but ignorance of the law doesn’t mean you can get away with what you do. The effects of what they did have impacted the company so much that they had to move to a new location, and they operate under bankruptcy protection.
There are many ethical issues that pertain to this issue, as well as many laws that were broken. First, what some call “creative accounting”, this is when a company tries to do something with their accounting reports to make the company look very profitable so that they can attract new investors. This is a big ethical issue because it deceives people into thinking they are investing well, when in the end they will probably lose it all. Adelphia partook in these practices and tricked a lot of people into believing that they were profitable. Another ethical issue faced in this scandal was that of improperly spending the company’s money. John Rigas went on a spending frenzy wasting lots of the investors’ money. The laws broken were as stated before, conspiracy, bank fraud, and security fraud.
“In 2001 Adelphia failed to file its 2001 10-K.” (Reference #3) Then in 2002, on the 25th of June they filed for bankruptcy. You can see if you go to the audit analytics, that because they didn’t file their 10-K in 2001, there are no stats that show what the 2001 audit fees were or the fees related to them. However you can see that the next years to come, the fees shot way up!
The law that requires management of a publicly traded firm to provide a report on the assessment of internal controls on the firm, and the one that requires an external auditor on a publicly traded firm to provide a report on the assessment of internal controls on the firm made by the management of the firm is the Sarbanes-Oxley Act of 2002, and these two laws come from section 404 of the act itself. Here is what the law specifically states, “(a) Rules Required. The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 to contain an internal control report, which shall--
(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. (b) Internal Control Evaluation and Reporting. With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a