Adelphia Corporation Scandal
Adelphia Communications was founded by John Rigas in 1952, when he turned a $300 dollar investment a half-century ago into Adelphia Communications Corp which was the sixth largest provider of cable service in the United States in 2002 when its major accounting scandal was reported. Its headquarters was located in Greenwood Village, Colorado. At the time it was the fifth largest telecommunications company in the United States with annual revenue of $3.61 billion, it made rapid strides to the top until accounting scandals ripped the company apart. It was eventually sold to Time Warner Cable, Comcast and Pioneer Telephone in July 2006.
In 2002, Adelphia disclosed that it had $2.3 billion in off balance sheet loans and this money was used by the Rigas family for their expenses. John Rigas bought the Buffalo Sabres team for $150 million and this came from Adelphia. ???It paid $12.8 million in 2001 for office furniture and design services provided by Doris Rigas. Even John Rigas good works were tainted. Adelphia paid a Rigas family partnership that owns the Sabres $744,000 for luxury-box rentals, hockey tickets, and other entertainment costs. That means shareholders probably picked up the tab for all those children who went to games. The same goes for the beekeepers visit to Cowburns house. It turns out the primary source of income at Rigas farm wasnt honey sales; it was providing landscaping, snow removal, and other maintenance duties for Adelphia.??? (Leonard, Harrington, Burke, Rigas, Rigas, Cohen, 2002, p.137). When this information got to the public, John Rigas as well as three of his sons James, Tim and Michael resigned from the board.
The Rigas family rigged the companys balance sheet by inflating the number of subscribers and increasing the routine expenses that were entered as capital expenses in the balance sheet.
In June of 2005, ???John Rigas, was sentenced to 15 years in prison on Monday for his role in the looting and debt-hiding scandal that pummeled the company into bankruptcy??? (Associated Press, 2005). John was accused for purchasing 17 company cars illegally, 3600 acres to preserve their land at the family home in Pennsylvania, abundance of personal luxuries, and finally two large Christmas trees flown from a New York shop. The Rigas??™s were charged with violations of securities. Tim Rigas faces 17 years on charges of conspiracy, securities fraud and bank fraud. (New York Times, 2008).
Even after the scandal the company did not seek for their family members to pay restitution but they did however seize $1.5 billion dollars in assets. In this case many of the company??™s financial statements were not balanced, because monies from the company were coherently ???missing??? (Associated Press, 2005). This case was deemed by the Department of Justice, the United States largest white collar case. While looking into similar cases, this by far is one of the biggest money looting schemes in American History. Not only did this company face significant fines and forfeitures, they also committed many ethical issues that affected their entire family.
Deontology is defined as an ethical theory that the morality of an action should be based on whether that action itself is right or wrong under a series of rules, rather than based on the consequences of the action. Deontology is a form of moral philosophy centered on the principles of eighteenth century philosopher Immanuel Kant. Its name comes from the Greek words deon and logos, meaning the study of duty. This school of ethics is based on the notion that people have the duty to always obey moral rules, regardless of any positive outcomes that can come from breaking them.
The basis of deontology is to assess a person??™s character by how well he or she follows moral rules, even if by doing so, tragic results occur. It is in direct contrast to consequentialism, a form of ethics that determines the morality of actions by the results they produce. Consequentialism favors the Good over the Right, while deontology always advocates the Right over the Good.
The deontological model of ethics determines the correctness of a moral action by determining if it follows moral norms. There is no subjectivity and a moral rule is always be obeyed without any thought. For instance, Kant gave the example that it is wrong to lie even if it could save a person??™s life.
???A code of ethics is not a simple set of rules. A code of ethics can help a company, group of people or single person as a “guiding light” for how to make decisions and approach situations. A code of ethics is more about applying a belief system to all situations, and such a code can be a major strength in an individuals personal and professional life???. (www.ehow.com)
???According to U.S. Legal, a code of ethics is “a set of principles of conduct … that guide decision making and behavior.” A code of conduct basically guides people in making ethical decisions, thereby furthering their own lives or the company or organization they work for. U.S. Legal goes on to say a code of ethics is key in shaping a persons integrity and credibility???. (www.ehow.com)
While reading the Adelphia Corporations case you may wonder if they committed any ethical violations. After reading the above definition the answer is Yes! The head CEO John Rigas was aware of the money laundering conspiracy he committed. One huge ethical issue he did was lying to his shareholders. A shareholder can be defined as any one person or persons investing in a company to hold partial ownership. Some of the larger investors in a company have voting rights on the company??™s board to make company decisions. Being that Rigas committed an ethical violation by lying to his shareholders, it cost his stakeholders billions! Adelphia Corporation has hundreds of shareholders that felt the impact of this conspiracy theory. Because Rigas was convicted and the company was forced to file for bankruptcy in 2002, the shareholders felt the impact when stocks plummeted. I would classify this as an ethical issue because in today??™s business because everyone should be honest with each other especially when the stakeholders and partners are at risk of losing money and at times their whole life savings ruining their family futures.
Another ethical violation in this case was purchasing items that did not benefit the company or the stakeholders, but in fact benefitted the family that was convicted of money laundering. Stakeholders vote on what the company can and cannot purchase because they hold voting rights at board meetings when making such decisions. The Rigas family purchased luxury items using company revenue and shareholders stocks and bonds without the consent of the shareholders.
Deontological ethics can be define as, ???is the normative ethical position that judges the morality of an action based on the actions adherence to a rule or rules. It is sometimes described as “duty” or “obligation” or “rule” based ethics, because rules “bind you to your duty”. Deontological ethics is commonly contrasted to consequentialism.???(Flew 1979).
Let??™s explain the definition, ???judges the morality of action (Salzmann, 1995) The meaning of morality of action basically ask, did the person or persons commit a negative action willfully and knowingly or was it a simple mistake In this case they directly violated deontological ethics because the entire family had knowledge of the crimes they were committing and willfully committed the crime without being coerced. So in this case there was no rule that, ???bound them to their duty.??? Their actions were simply greed of the family to launder as much money from the company accounts in which neither the company nor the stakeholders benefitted from. Prosecuting them to the fullest extent of the law was the best scenario from the case of the Adelphia corporation scandal.
In this case Kant??™s theory is simple. Did they have knowledge of what they were doing Was the company and stakeholders benefiting Was it an accident The answer is NO! This family committed a crime that directly violates Kant??™s theory of people willfully and knowingly committing a crime at this scale.
Effect of Sarbanes-Oxley Act
Sarbanes-Oxley Act was introduced in 2002 and contains 11 sections that specify the rules and requirements related to financial reporting by public companies. This act could have identified the frauds happening in the company in time which could have prevented the company from bankruptcy. The public company accounting oversight board (PCOAB) could have monitored the audit of the independent auditors. The enhanced financial disclosures would have made it easier to track the large amounts of money being used for personal needs.
In the case of the Adelphia Corporation scandal I believe that the Department of Justice made the right decisions by maximizing their punishment to the fullest extent of the law. Not only did the Rigas family commit a crime, but they altered the lives of many innocent people around them specifically the stakeholders. Ethical issues in this case are easy to define; they lied to stakeholders and did not allow voting members in the corporation the right to vote. This was a direct violation of Kant??™s theory. This family willfully committed a crime and had knowledge they were committing such crimes in which only they and their family members benefitted from.
Salzmann, Todd A. 1995. Deontology and Teleology: An Investigation of the Normative Debate in Roman Catholic Moral Theology. University Press.
Flew, Antony. 1979. Consequentialism. In A Dictionary of Philosophy, (2nd Ed.). New York: St Martins.
“Ethics Resource Manual.” Direct Selling Association | Ethics, Trust, Confidence. Linda Ferrill. Web. 23 Feb. 2011. .
Leonard, Devin; Harrington, Ann; Burke, Doris; Rigas, Micheal; Rigas, Tim; Cohen, Oren. (2002). The Adelphia Story. Fortune; 146(3), 136-148.
Lowenstein, Roger. (2004, February 01). The Company they kept. New York Times.
The Associated Press. (2008, July 13). Adelphia Founders charges upheld. New York Times. p19.