The Major Scandal of Fraud and Loss at Adelphia - Example

The major scandal of Adelphia School The major Scandal of Fraud and Loss at ADELPHIA Introduction Adelphia started its operations in 1952 from small operations as a small cable franchise which involves 25 customers. It started growth and by 1990’s is had became the sixth largest cable organization in U.S. This firm suffers from a major accounting scandal (fraud) in the year 2002 which led to its bankruptcy and reorganization subsequently (Answers.com, 2010). History In 1952, Aldephia was founded when a person named as John Rigas on account of a TV cable franchise, paid $100 in the Coudersport (a small town) in Pennsylvania (Pittsburgh Post-Gazette, 2005) and started to run it as a small family business which was having just Twenty Five customers. The business of the organization steadily expanded and by 1990’s it became the world’s sixth biggest franchise in the cable industry (Rocky Mountain News, 2006). Fraud events at Adelphia: In March 2002, fraud discovery at Adelphia happened when Tim Rigas, the Chief accounting and Chief financial officer of the Aldelphia in a conference call, revealed that an amount of $2.3 billion had been consigned by the company as loan which was taken out by partnerships that had been run by Rigas Family members (Lowenstein, Roger, 2004). Aldelphia was fully liable to pay the amount of loan jointly but they were not able to disclose it in the books of accounts as the amount of loans has been omitted from the books. When this revelation happened, a formal enquiry was started by The Security and Exchange Commission in April whom later on turned into the criminal investigation for various types of fraudulent activities. As a result John Rigas along with his all family members resigned from the company. As a result the share price of the organization shows a significant decline as it plumed from $28 in March 2002 to 79 cents in June and it was delisted from NASDAQ. After this the company soon filed for the protection relating to the bankruptcy and began reorganization. The company also had made more misrepresentation in the issuance of the public statements and other filings in order to keep this all appearance as well as they have created deceptive transactions and untrue documents in order to prove that the amount of loan has been repaid. Another major fraud which they committed was their intentional misstatement which they made in their financial statements through which they wanted to give an impression that the company’s performance meets the analysts expectations and mislead investors with respect to their hopes that Aldephia meets and had enhanced their expectations of growth. The final and last category is the representation by way of fraudulent misrepresentations and major omissions of the material facts which were carried out to conceal self-dealing made by the Rigas Family. This comprises of actions in which the Rigas Family had obtained over $1.3 billion in company shares and currency from Aldephia’s funds by way of manipulation of their cash management system. The other major self dealing transaction which was initiated and recorded in the software included paying off $241m of their family personal debt from Adelphia’s assets , which involves paying $26.5m for timber rights relating to the Rigas property to protect the view relating to the outside of the Rigas family home and spending about $12.8m of the company’s money with regard to the building of the golf course and a club house for the exclusive use of their family use which was all from the Aldephia’s $ funds. These all transactions were made from the funds of Aldephia but no one transaction of these have been disclosed to the stakeholders and investors of the Aldephia. Many of these transactions were facilitated through their ability which made easy for them to override the journal entries in the cash management system by producing journal entries in the software used by Adelphia’s Millennium General Ledger systems. 1. Failure of the Firms Accounting information system to prevent the related fraud: The accounting system of the company (Millennium) failed to prevent and detect the fraud as it involved hiding debt in unconsolidated subsidiaries. Cash management general ledger system of the software have been override and so Fictitious journal entries were made in the general ledger which was maintained through their software. Aldephia also had entered into co-borrowing credit facilities with various members and businesses of the Ragas family owned business for which they were liable jointly for the entire amount which was borrowed. Its accounting system fails as its management related to the accounting for the financial statements kept these borrowings off the books by the way of allocating the amount of loans co-borrowed among its unconsolidated subsidiaries. Subsidiaries debts were increased and the Adelphia’s own debt was decreased by an equal amount. Its accounting systems and personnel had kept all this intentionally hidden and giving the investors a false impression that the company is leveraging and are paying off the debts. 2. If the company would have used third party accounting system. Evaluating its effectiveness on the firms stakeholder in case of third party accounting software breach: If the company would have used third party accounting system and then the same breach would have been occurred and that third party accounting software would have failed to prevent or detect the fraud then its effect on the relevant stakeholders (creditors, debtors, banks, government, shareholders would have been significant. The third party would have been liable for this breach as the accounting software provided by them failed to prevent and detect the fraud of the accounting information to be booked as well as those personnel of the organization who had intentionally committed such fraud. Sine, the major victims of this fraud, has also turned to the external auditors for the compensation as the external auditors were supposed to detect such fictitious entries and the recording of incorrect accounting treatments and disclosures so they were also held liable by the victims to provide them with further compensation so in the same way the same way, the third party software provider would also have been held liable for such compensation. However if the third party software had been used and such breach has occurred after that then at least the internal accounting system software provider would have not been held responsible for that failure of the accounting software in the detection of the fraud. The software provider would had been held responsible and he may suffer legal obligations from both the business stakeholders and other clients as it creates a lot of doubts upon his technology used in the development of the accounting software for accounting purposes. 3. Advancements in accounting and information technology that could have prevented the event from occurring: The relevant accounting and information technology would need some innovative advances so that it may be able to help in the prevention of such frauds (Porrini, Hiris and Poncini, 2008 ). Like the software developers who create accounting software’s would need some accounting and financial experts in their organization who may help the software developers to have an understanding of the accounting frauds which may result due to such hiding of the accounting disclosures. Information technology experts who make accounting software just have a knowledge of information and not a deep understanding of the accounting matters so by working in collaboration with the accounting experts they can incorporate almost all those necessary technology while developing their software’s which may ensure that such accounting frauds could not be incorporated as far as their accounting software’s are concerned. Also other advance that may be needed in the accounting and information technology is that such accounting softwares may be presented to the major accounting body for example IFAC so they may have a look at the software and by testing it in the accounting environment validate such software for use. After getting accreditation from such professional accountancy bodies the software which has been accredited for or given license will become a credible source for the companies and other major clients to trust upon such software’s for the financial and accounting purposes. Moreover the specific accounting regulatory bodies must make clear that if any organization is found guilty in such corporate frauds then such frauds committed would be taken into account for appropriate regulatory actions. There must be a well qualified internal audit department having the knowledge of the specific accounting and auditing standards so they may have well appropriate knowledge of the steps to be taken to know that whether such journal entries have been recorded or not. The advances accounting techniques also need to be provided to the appropriate financial accounting personal so they may well be aware of such treatments to be made in the financial accounting books. 4. Changes to be Sarbanes-Oxley Act of 2002 and other current law: Although the Sarbanes-Oxley Act of 2002 and other current laws have a lot of sections and provisions relating to the punishment and penalties to be imposed on the management of the companies as well as the software providers, external auditors, legal experts and consultants if they are involved on any of the fraudulent reporting or trying to conceal any material information which could have an impact on the users of the financial statements or for any changes made to such financial statements in order to bring them into a form so that the relevant fraudulent accounting purposes may be achieved, still some changes in such acts would be appropriate to discourage such fraudulent acts (Green, 2004). Like if a company is founded guilty in any illegal and fraudulent or manipulation of the financial information and reporting, that company would get deregistered from the panel of the companies so that other companies would have precedent to look into that if they try to commit any fraud or get involved in any such activities then they would also be delisted or deregister from the panel. Similarly instead of instituting civil proceedings against such companies or personal involved in such fraudulent or manipulating activities, criminal proceedings may be initiated against them so they would be aware of the fact that there will be severe consequences if they are caught involved in any such activities. 5. Strategy that company may implement to prevent future business failure and approach to be used for the implementation of such strategy: The strategy which I would recommend to the company so that it may be able to prevent future business failure is that, The company must seek well qualified professional accountants so they might have a very better understanding of the major and significant accounting issue and their disclosure requirements as per International accounting standards and as per local laws and regulations (Biegelman and Bartow, 2012). When such professional employees will be hired then there will be very rare chances for that any major accounting treatment might not be correctly accounted for or any major accounting disclosure which may have been disclosed would not be disclosed in the financial statements. Moreover the company should also get well trained and experienced and qualified information technology personnel so may be able to internally develop such accounting software that they may be able to detect any such violation and concealment of the accounting treatment and disclosure. Organizations must have a policy implemented to make ensure that if any such employee is found involved in any such activities then they will be terminated from the employment on urgent basis and would also face legal consequences so that it will make ensure that the employees of the company will have the consequences of such fraudulent actions in their mind. Further the organization might also focus on its well established and competent Internal audit department so that any such violation may be detected internally before it is detected by the external regulatory authorities. For this purpose the internal audit department would comprise of well qualified auditors and well experienced personals in order to be able that they may discover any such accounting violation and hiding of the disclosures. These three departments must have independent from the upper management like directors, chief executive officers so they may not come under the pressure for any such false and misrepresentation of the accounting treatment and disclosure. Organizations members and stakeholders must ensure that the external auditors appointed by the management and audit committee of the organization is a very well reputed firm in the international and local market as the good reputed firms have well professional and well experienced competent auditors and audit partners who have such diverse knowledge of the accounting and audit practices that they can easily detect such fraudulent and concealed information and by making adjustments through the organizations management bring it into the audited accounts and mention in their audit reports the relevant significant matters and by qualifying their audit opinion (where qualification is required) so that the stakeholders of the company be made aware of such changes and adjustments made in the financial audited accounts. The company may follow a systematic approach for the implementation of the strategy as suggested above and should obtain appropriate approval from the promoters of the company so that it would be in their knowledge that such strategy has been implemented for the prevention and detection of the fraud. References Adelphia Communications Corporation, Answers.com. Retrieved 2010-08-24 Adelphia Communications to sell long-distance phone service, Pittsburgh Post-Gazette, July 6, 2005 Adelphias assets now in hands of cable giants, Rocky Mountain News, August 1, 2006. "Adelphia founder John Rigas found guilty" from MSNBC Lowenstein, Roger (February 1, 2004). "The Company They Kept". The New York Times. Biegelman, M. T. & Bartow, J. T. (2012) Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance Wiley; 2 edition Porrini, P., Hiris, L. & Poncini, G. (2008) Above the Board: How Ethical CEOs Create Honest Corporations McGraw-Hill; 1 edition Green, S. (2004) Managers Guide to the Sarbanes-Oxley Act: Improving Internal Controls to Prevent Fraud Wiley; 1 edition Brooks L. J., Dunn, P. (2011) Business & Professional Ethics. Cengage Learning; 6 edition Biegelman, M. T., Biegelman, D. R. (2008) Building a World-Class Compliance Program: Best Practices and Strategies for Success Wiley; 1 edition Read More