Impact of Corporate Scandals on Individuals, Entities & Society: The Case of Adelphia Research Paper

In recent years, numerous organizations have captured public attention for their involvement in spectacular cases of corporate fraud, leading to a multiplicity of negative consequences at every level of society (Mishina et al., 2010). The present paper aims to use the 2002 corporate scandal involving executives of Adelphia Communications Corporation to demonstrate the negative impacts of corporate fraud on individuals, corporations, businesses and the society at large.

In 2002, family business owners John Rigas (co-founder and CEO), Michael Rigas (executive vice president for operations) and Timothy Rigas (chief financial officer) were accused of defrauding Adelphia in excess of $ 2.5 billion by engaging in a variety of conspiracies involving securities fraud, wire fraud and bank fraud.

In summary, the Rigas were accused of violating the RICO Act, breach of fiduciary duties, waste of corporate assets, abuse of financial control mechanisms, breach of contract, unjust self enrichment, and fraudulent conversion of corporate assets into private ownership (Diana, 2005).

Researchers are in agreement that such illegal activities progressed by the very executives entrusted to safeguard the interests of the firm often result in adverse consequences for the individuals involved, the entity, as well as the society (Mishina et al., 2010). At the individual level, the culprits not only lose their jobs and earnings but also their professional reputation and social standing.

In the case scenario, the Rigas were arrested and successfully prosecuted for defrauding the cable company, hence exposed to public shame and ridicule for their involvement. By extension, their ‘successful’ corporate careers were put to an abrupt end. Additionally, these individuals were exposed to immense physical and psychological anguish as they languish in prison.

Corporate frauds are also known to negatively impact on the general population in various ways. For instance, there have been instances where taxpayers have been forced to bear the brunt of corporate scandals through taxation (Johnson et al., 2005), and also through increased costs of products and services (Pathak & Wells, 2008).

Although the U.S. federal government did not use taxpayers’ money to bail out the cable company as has happened with other companies involved in corporate frauds, it is highly possible that the general public suffered as they put up with inflated costs of services provided by Adelphi.

It is also important to note that the shareholders of the company must have been exposed to enormous physical, psychological, financial suffering and loss as they came to terms with the fall in share price and risk of losing their investments entirely due to the damaged firm reputation (Pathak & Wells, 2008)

The adverse impacts of corporate fraud are more severe at the entity level, particularly in terms of damaged firm performance, loss of image and reputation, loss of access to important resources, loss of net income leading to a reduction in shareholders’ equity, lowered credit rating, as well as eminent collapse and/or bankruptcy (Mishina et al., 2010).

Although Adelphia did not collapse, the exists overbearing evidence to suggest that other big companies such as WorldCom and Enron were brought down to their knees and indeed collapsed under the heavy weight of corporate scandals (Johnson et al., 2005). Lastly, the society at large is negatively affected by corporate scandals.

For instance, while banks and other lending institutions are put in jeopardy as they are unlikely to retrieve the funds that were given to the firm in case it goes under, community members suffer the anguish of increased taxes to cover for fraudulent activities.

Employees working for companies engaged in fraudulent activities are more likely to lose their employment and income, triggering a scenario whereby a sizeable number of community members have considerably reduced disposable income which bears a direct effect on the rest of the firms operating within the community as people will not be as inclined to eat out, purchase new vehicles or real estate, or spend money on anything else but the essentials (Pathak & Wells, 2008).

References

Diana, T. (2005). Corporate executives and auditors try on SOX. Business Credit, 107(5), 24-30.

Johnson, S.A., Ryan, H.E., & Tian, Y.S. (2005). Executive compensation and corporate fraud. Web.

Mishina, Y., Dykes, B.J., Block, E.S., & Pollock, T.G. (2010). Why “good” forms do bad things: The effects of high aspirations, high expectations, and prominence on the incidence of corporate illegality. Academy of Management Journal, 53(4), 701-722.

Pathak, J., & Wells, A. (2008). Financial Fraud: Causes, consequences and the accounting profession’s role – A Canadian perspective. ICFAI Journal of Audit Practice, 5(1), 24-35.