ADELPHIA CHU2

Background
• Adelphia Communications Corporation
• Was a cable television company headquartered in Coudersport, Pennsylvania.
• Was the fifth-largest company in the United States before filing for bankruptcy in 2002
• Founded by John Rigas
• Fraud Case
• First reported in June 2002
• The CEO of Adelphia, John Rigas and his two other executives, Timothy and Michael Rigas,
were charged with looting the company “on a massive scale”
• Other key players involved include; James Rigas, Peter Venetis (son in law), Michael
Mulchachey, and James Brown
• The Rigas family was alleged of taking millions of dollars from the company to pay for luxuries
and to cover personal investment losses
• Based on available information about Rigas’ disbursements the amount he could have stolen
would sum up to be $1,000,000 per month
• In 2002 the company went bankrupt after their scandal was uncovered. John Rigas and his
sons were sentenced to prison
How was the fraud perpetrated
• They excluded billions of dollars of liabilities from their financial
statements
• Inflated earning and net income so that they could be highly
evaluated at Wall Street
• Used cash from Adelphia Communications to buy assets from Rigas’
other family-owned businesses
• Made private relationships with other entities, such as Citibank, to
cover crimes
• Changed journal entries to provide flaws for the Rigases to receive
more debt at no cost
Fraud Triangle
• Pressure
• Personal Financial Debt
• Lifestyle and Family
• Opportunity
• Family Dominated Business
• Poor Internal Controls
• Centralized Management Style
• Rationalization
• They used part of the money for charity purposes
• They thought that it would somehow benefit the company and its employees
stating “Our intentions were good, The results were not” during their trial
Uncovering of the Fraud
• The scandal broke out when a footnote in a quarterly earnings
statement revealed that the Rigas family had borrowed more than
$2,000,000,000 from the company.
• People then became suspicious, so a financial analyst did some
investigating and discovered $1,000,000,000 worth of off-the-book
related party transactions, specifically to Rigas’ other family owned
businesses
• This cause the SEC to investigate Adelphia Communications and had
them delay their 2001 annual report and re-report its financial
reports for the previous 3 years. Evidently, uncovering the Fraud.
Improvements to the Audit Sector
• The external auditor of Adelphia, at the time of their scandal, was
Deltoitte & Touche LLP
• Their Chief Executive said that the auditor “lacked objectivity”
(Retuers, 2011). Since then, they are now training employees to have
a higher degree of professional skepticism and place more focused on
related party transactions.