The 2002 accounting malpractices and auditing failure that had an impact on Enron Company was also imminent in Adelphia Communications. Like Enron, Adelphia Communications succumb into a financial trouble.
Direct injuries sustained by corporate stakeholders were staggering, and the collateral damage inflicted on the public was frightening. Ideally, reports of corporate shenanigans and failed financial institutions dominated newspaper headlines. This case outlines the decline of Adelphia Communications due to poor corporate governance that was reluctant in instigating strict and up-to-date internal controls. Adelphia Communication is a cable industry that s known worldwide. Founded in 1952, the Company exhibited successes in telecommunications field. It became highly competitive and recognized by various shareholders.
The company was incorporated in 1972 under the name of “Adelphia.” The Rigas family started Adelphia Communication Company. The little group of five small-town cable systems grew slowly but steadily through the 1970s; things changed when Rigas’s three sons Michael, Tim, and James, joined the company in the early 1980s (Gilson, 2010). Adelphia Communication’s Chairman and CEO, John Rigas, was responsible for the managerial activities of the company since its incorporation. The company provided communication devices and cables to its consumers.
In March 2001, as Adelphia was preparing its 2000 annual report, its auditor Deloitte & Touche urged the company to disclose that it had guaranteed loans to the Rigas to buy Adelphia stock. Chief Financial Officer, Tim Rigas, argued that the company only had to disclose the size of the credit line, not the actual amount borrowed or the use of the proceeds. Deloitte relentd, and the annual report disclosed only the size of the credit line. As such, that was the beginning of the Company’s financial problems. A year later, however, Deloitte insisted that the company disclose the full scope of the Adelphia/Rigas co-borrowings in its 2001 annual report.
In a footnote, in the 2001 annual report, Adelphia disclosed for the first time the existence of $2.3 billion in outstanding co-borrowings.As the bankruptcy moved forward, a complete picture of the scandal emerged. In addition to using the co-borrowings to buy Adelphia stock, the Rigases had used the cash management system to fund a variety of personal projects. This was a clear scenario of the company’s lack of strict internal control systems.
It was disclosed that the company had made the purchase of Buffalo Sabres hockey team, the development of a golf course, and the production of a movie by Ellen Rigas. It also turned out that many of the charitable gestures of John Rigas had become famous for in Coudersport had, in fact, been financed by Adelphia’s shareholders. One of the most significant issues raised was that the auditor for Adelphia failed to inform the Adelphia audit committee about the inappropriate use of company funds for family expenses. Ideally, it can be argued that the problem may be attributed to the fact that Rigas family members served on the audit committee (Gilson, 2010). Consequently, the company’s managerial team would have initiated strategies that would have minimized the impact of its downward financial fall (Gilson, 2010).
The selfishness of the family members for not involving other board members in decision-making led to the adversity of the situation. In other instances, where the board of directors could have been involved in decision-making, some of the costs that the company incurred would have been reduced. Indeed, the Chief Financial Officer did not consider the Adelphia Communication Company’s interest and that of the shareholders as a whole, when it issued the charitable funds to the Rigas family members. Cutting down the costs would have ensured that the management would have reduced its $2.3 billion co-borrowings to a manageable amount. In addition, the management should have considered paying the borrowed amount in time.
The company did not focus on the implication of the borrowed amount on their financial stability, and they ended up investing in irrelevant investments. The company used the borrowed amount to issue charitable funds to the Rigas family. This was not acceptable as it led them to bankruptcy. Having a debt of $2.3 billion and being a middle-sized corporation implied that the company was in a risk of being liquidated. The downfall of Adelphia communication was attributed to poor internal control systems.
The company that is usually controlled by family members’ faces the risk of biasness. It lacks proper control systems that differentiate family’s activities from company’s activities. Indeed, in enhancing proper internal control systems, the company would have allowed the outside agency to take control of the business operations. The outside agency should be given the independence it deserves in order to provide a non-coerced decision on the company’s operations. In addition, the management should learn to have self-control in its spending. Increase in expenditure, especially to irrelevant transactions, will increase the company’s chances of being declared bankrupt.
Finally, strict internal control systems will ensure that the company’s borrowed funds are returned in the stipulated time framework.