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Adelphia Communications Scandal and Ethical Issues Case Study

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Updated: Jul 31st, 2020

The scandal

The Adelphia Communications scandal is one of the most controversial financial scandals in recent years. Adelphia is a company incorporated in 1952 as a family business by the Rigas family but was listed publicly, later on, making it mandatory for the company to publish its annual audited report for scrutiny. However, the scandal came into the limelight in 2002 when the audited report of the company’s quarterly financial statement showed that the Rigas family had borrowed from the company over $2 billion (Grant and Nuzum, 2004). A close follow-up revealed that the Rigas family had not paid this amount back.

Grant and Nuzum (2004) reveal that several warning signs were eminent before the detection of the scandal, which showed that something was at a mess in the company. This is because of the huge sums of money involved, and the suspicious arrangement the Rigas family made with the company that required the company and the Rigas family to be guarantors of each other.

Subsequent investigations revealed that the Rigas family indeed fraudulently obtained billions of dollars from the company for their gain. In this regard, Grant and Nuzum (2002) noted that the Rigas family treated the company as their cash machine, where they borrowed a large amount of cash quite often without paying back. However, the Rigas family made sure that their fraudulent act becomes difficult to detect by excluding the amount they siphoned from the consolidated financial statements and the affiliated statement of the financial position of the company. Also, the Rigas family concealed its fraudulent act by inflating the company’s earnings, falsifying operation performance, and blatantly concealing self-dealing to meet the expectations of Wall Street and shareholders (Nuzum, 2002).

Grant and Nuzum (2004) reveal that the scandal led to the arrest of the Rigas family, consisting of the 79-year old chief executive John Rigas and Timothy, his son. Consequently, the federal court judge found the two guilties of conspiracy and fraud. Judges also convicted the Rigas family for cheating investors and the public concerning the company (Grant and Nuzum, 2004).

Key ethical issues in the Adelphia Communications scandal

The Adelphia scandal is one of the scandals that have raised several ethical questions regarding the management of an organization. The professional code of conduct does require managers and executives to behave ethically. However, this scandal raised two grave ethical questions involving the conduct of both Deloitte, the company, and the Rigas family. The first key ethical question regards the behavior of Deloitte, which was the company’s external auditor. The second ethical question regards the unethical behavior of the Regas family that led to the scandal.

In the first key ethical question, shareholders and the public did trust Deloitte, Adelphia’s external auditor, to be able to detect and report the fraudulent acts perpetrated by the company and Rigas family. However, this was not the case because Deloitte failed to detect the frauds giving the company an unqualified report. However, according to the professional auditing code of conduct, Deloitte’s failure to detect and report the fraud perpetrated by the Regas family is an unethical act. The reason being the AICPA professional code of conduct requires an auditor like Deloitte to act in the interest of the public, a duty it failed to execute (Barlaup, Drønen, and Stuart, 2009).

The auditor’s professional code of conduct expects auditors to be able to detect fraud in a company. Further, the code requires auditors to be vigilant to recognize any fraud that might exist in the company’s books of accounts and financial statements (Barlaup, Drønen, and Stuart, 2009). Therefore, going by the magnitude of the fraud at Adelphia, an individual would expect a professional audit team like Deloitte to have detected the frauds and conspiracy. This is because several warning signs pointed out that something was at a mess, which Deloitte should have taken note of in its verification of the company’s books of accounts.

Therefore, it raises an ethical question of why a large audit firm likes Deloitte would fail to detect fraud of such magnitude. Grant and Nuzum (2004) argue that many expect a large audit firm like Deloitte to have the necessary skills to audit the books of account and express an opinion that serves the interest of the public, a responsibility it failed to adhere to by giving a false audit opinion. Therefore, its failure to detect fraud of such magnitude leaves one wondering whether the company lacked the competence or it was an act of negligence, which is unethical.

The second key ethical problem pertains to Adelphia’s duty for ethical behavior. According to the scandal, we understand that the Rigas family siphoned billions of funds for its gain at the expense of investors. This is because the investigations revealed that Rigas built a golf course worth $12.8 million using money it fraudulently obtained from the company. Also, the investigation revealed that Rigas hid $2 billion it took from the company in the pretense of paying back for his personal use. However, according to the professional code of conduct, executives must refrain from using company profits for personal use. Therefore, Grant and Nuzum (2004) argue that it is unethical for the Rigas family to use investors’ money to enrich themselves.

Also, the professional code of conduct expects managers to report the financial situation truly and fairly, whether in debt or not. However, according to the Adelphia scandal, the report indicated that Rigas omitted material facts from the company’s consolidated financial statements and statement of financial position in a bid to conceal its fraudulent act. Rigas omitted even the 2 billion dollars while also inflating the company’s earnings to conceal their acts. Duska and Duska (2003) argue that this is unethical behavior under the professional code of conduct.

Deontological ethics

Deontological ethics is duty-based ethics that focuses on the actions of individuals and not the outcome of their actions. According to this theory, an individual needs to do things, which are right because they are the right things to do under the circumstance. At the same time, it holds that people should avoid doing wrong things because they are wrong (Hephaestus Books, 2011).

Kant, an ethical philosopher, also formulated a categorical imperative duty-based ethics founded in two versions. The first version states that all moral rules must be universal. This implies that people should act in a manner that may become a general law that is usable by everybody under the same circumstances. The second version states that all moral rules must show respect to people. This version mainly emphasizes on the need of treating persons properly (Hephaestus Books, 2011).

Applications of deontological framework

According to the first ethical problem in the Adelphia scandal, Deloitte’s actions amounted to the jeopardy of its ethical duty of expressing an opinion that represents the true state of affairs of the company’s books of account. This is a duty it failed to administer since it gave the company an unqualified report despite the scandal and conspiracy at the company. Taking into consideration the deontological duty-ethics, Deloitte must avoid misleading the shareholders by giving unqualified report and should have avoided doing so because it is wrong (Hephaestus Books, 2011).

In the second ethical problem, Grant and Nuzum (2004) noted that Rigas defrauded the company billions of dollars in the pretense that the money was to pay back. Also, after conspiring to defraud the company, the Rigas family concealed the transactions by omitting material facts while inflating earnings. According to deontological duty-ethics, these acts by the Rigas family are intrinsically wrong, and they have a duty not to engage in them (Hephaestus Books, 2011).

Application of the categorical imperative theory

Going by the opinion expressed by Deloitte on Adelphia’s financial statement, these duty-based ethics under the theory would condemn the actions of Deloitte because Deloitte’s actions are not usable as a general law applicable to every company under the same situation. This is because auditors prevented from expressing an unqualified opinion on a financial statement that does not present a true and fair position of the business (Hephaestus Books, 2011). In this regard, it is apparent that Deloitte went against the categorical imperative framework.

Kent’s categorical imperative is also applicable in the second ethical dilemma regarding the behavior of Rigas. In this regard, it is apparent that Rigas did not respect its investors by blatantly defrauding them large sums of money. The second version of the theory emphasizes the need to treat others with respect to duty that the Regas family failed to administer (Hephaestus Books, 2011).

References

Barlaup, K., Drønen, H.I., & Stuart, I. (2009). Restoring trust in auditing: ethical discernment and the Adelphia scandal. Managerial Auditing Journal, 24(2), 183-203.

Duska, B.S., & Duska, R.F. (2003). Accounting ethics: foundation of business ethics. Oxford, UK: Blackwell Publishing Ltd.

Grant, P., & Nuzum, C. (2004). Adelphia founder and one son are found guilty. The Wall Street Journal. P. 21.

Hephaestus Books (2011). Articles on deontological ethics, including Immanuel Kant, Robert Nozick, John Rawls, Original Position, Christine Korsgaard, Categorical Imperative. New York, NY: Hephaestus Books.

Nuzum, C. (2002). Adelphia loss widened in the fourth quarter as telecom spinoff files for Bankruptcy. The Wall Street Journal. P.6.

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