Project Name
Introduction
According to Biegelman and Bartow (2012), business entities after the Great Depression have streamlined their efforts towards identification and seizure of any potential business opportunity in a bid to emerge stronger and resilient. Some employees in these companies have however opted to engage in some fraudulent activities and this has stimulated the regulation authorities to beef up their investigations and enforcement mechanisms to curb the increasing rates of corporate fraud cases.
Adelphia Communications Corporation was a successful business in the US founded by John Rigas, a son to a Greek immigrant. He was assisted by his two sons who served as executives in the business and out of the huge profits deemed to have been generated by the business; the family lived a luxurious life. However, the presumed high profitability of the business lay behind a corporate fraudulent secret that was eventually exposed; Adelphia had been converted into a personal piggy bank. On the fateful day, 24th July 2002, Rigas, his two sons and other two executives for the company were all arrested by US Postal Inspectors. They were all accused of several offences: conspiracy to commit mail fraud, wire fraud, bank fraud and securities fraud.
When Rigas and his sons knew they were to be arrested, they opted to surrender but the government rejected that idea and pushed for an open public arrest whose intention was to send a strong cautionary message to other corporate fraudsters. The company had well established schemes to defraud the stockholders, the public and its creditors to benefit their family. The fraud case for Adelphia, according to the US Attorney for the Southern District, was “one of the most elaborate and extensive frauds ever”. (Biegelman & Bartow, 2012, p.16).
Who were the involved parties?
The main participants in the fraud case at Adelphia were, John Rigas who was the founder of the business, his two sons who occupied executive positions in the business (Michael Rigas and Timothy Rigas), the company’s assistant treasurer, and the vice president of finance in the company. These were the four top officials in the company who were involved in nearly all transactions tailored to commit and conceal the fraud from the knowledge of the directors, shareholders and the public. (Mulligan & Hofmeister, 2004)
Crime Committed
This historical fraudulent scheme had thrived in the economy from for the period between 1999 and 2002. Investigation to prove the fraudulent activities and the grievous nature of the effects began in March 2002 and found out the following financial offences:
The company had lost a minimum of $ 1 million to Rigas and his sons in properly planned loot schemes.
They secretly received $ 1 million dollars on monthly basis in cash.
Out of the funds siphoned from the business, they had constructed a private golf course at a cost of $ 13 million. The appropriation of these funds was never disclosed to the key stakeholders other than the Riga’s family members. I.e. the board of directors, the public and other shareholders was not privy to the decision to apply the funds to the construction of a golf course.
They had borrowed up to $ 2.3 billion from banks and the company guaranteed loans that were not presented on the company records.
Payment of margin calls, amounting to $ 252 million, against loans received by the family from multiple lending firms.
The Rigas family members had deliberately used the company’s corporate helicopter and the apartments in the New York City, and instructed the employees not to disclose the personal use of corporate property for personal engagements. (Biegelman & Bartow, 2012, p.16).
They were specifically accuses with the following fraud charges:
Violation of the RICO act
Breach of their fiduciary obligations
Waste and misappropriation of the company’s assets
Gross abuse of control
Persistent conveyance fraud
Unjustified enrichment
Conversion of assets belonging to the company. (Kassem,2012).
According to James Brown, a former vice- president of finance at Adelphia, the company had all along maintained two sets of books of accounts for more than a decade. One set contained false records while the other one contained the actual figures.
Punishment
The case against the Adelphia top officials lasted since 2002 up to 2005 when the prosecution arrived at several individual judgments for each culprit. The jury found Michael Rigas not guilty of the fraud associated with the conspiracy and execution of the wire fraud and he acquitted him pending new trial on fraud on securities. The former vice president of the entity’s financial affairs who turned to a government informer due to his possibility of facing a long term imprisonment was also acquitted. (Lanzano, 2005)
Upon the proof of guilt for several cases of fraud and conspiracy for John and Timothy, the prosecution proposed a 215 year imprisonment terms on both of them. This sentence was proposed on the pretext that both men had initiated fraud that would drive Adelphia to bankruptcy. The proposal was however looked down upon the requests for leniency by the lawyers of the Riga’s’. John Riga’s was found guilty of several counts contributing to the fraud and was sentenced to a jail term of fifteen years in prison and a fine of $ 2,300. The sentence was termed as a “life sentence” for Riga’s who was aged 80 at the time of judgment and could only be freed upon a confirmation by doctors that he would die in three months after the release. Timothy Riga’s in turn was sentenced to 20 years imprisonment term in jail. (Biegelman & Bartow, 2012, p.17).
Damages
According to the Jury involved in the case for Adelphia, the fraudulent activities involved in the business had siphoned money from the business, the creditors and the general public. After the conviction of the fraudsters, the company was put under bankruptcy protection. The jury further declined Rigases and his son’s payment of restitution on the premise that the family had agreed to pay $ 1.5 billion to clear all the outstanding regulatory dues.
The case was however treated as a criminal offence so as to act as deterrent example to all other corporate managements that could be fraudulent. (Biegelman & Bartow, 2012, p.16).
Internal Control Weaknesses
Internal controls in any corporate entity are meant to ensure that there exist proper regulations that govern the operations of the business internally on a daily basis. They seek to ensure the achievement of utmost effectiveness and efficiency in their operations and ensure that the financial transactions and reporting are compliant to the applicable laws and regulations.
The fraud case at Adelphia as it emerged later implies that there existed very weak internal controls or they were inexistent of they were highly manipulated to suit the schemes of the business owners. The fraud case at Adelphia involved both misappropriations of corporate funds and assets at the same time. From the disclosure made at the court by the former finance vice president, there existed no internal controls in the business and all its operations. This is evidenced by the fact that the company maintained two sets of books of account, used the company’s helicopter and apartments in New York for personal business and the management, which was majorly the Riga’s family, instructed the employees not to disclose such usage on the financial records of the company. (Office of Mental Health.2015).
The lack of internal controls is also evidenced by the misappropriation of funds to the tune of $ 700, 000 which were applied to a private golf club. The facts state that the directors of the company were not aware of the application of such funds to such a project and it was not disclosed anywhere on the books. The receipt of $ 1,000,000 secret cash payments by Riga is also another evidence for the lack of internal controls in the business. Any cash receipts to a company should be properly documented and matched against the corresponding sale.
Detection of the Fraud
The fraud at Adelphia was however detected after the enactment of the Sarbanes-Oxley Act,which established the PCAOB that was meant to ensure improved reliability and quality of audits conducted on public companies by thoroughly and continually checking the auditors of these companies. The fraud was detected by the SEC when it was discovered that the company had excludes $ 2.3 billion debts from its financial statements
Fraud Prevention
It is the duty of the management of any company to put in place clear and strict guidelines that help in the prevention and early detection of any fraud committed in the business. The management of Adelphia however was the main actor in the fraud scam and thus no preventive measures were put in place.
The selection of this case was informed by the dynamic and comprehensive nature of the facts involved. The case displays many aspects such as fraud, weaknesses in internal controls and the inability by an external auditor to detect a material misstatement in the financial statements.
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References
Biegelman, M., & Bartow, J. (2012). Executive roadmap to fraud prevention and internal control creating a culture of compliance(2nd ed.). Hoboken, NJ: John Wiley & Sons.
Kassem, R. (2012). Earnings Management and Financial Reporting Fraud: Can External Auditors Spot the Difference? Retrieved from http://wscholars.com/index.php/ajbm/article/viewFile/46/20
MClam, E. (2005). USATODAY.com - Ex-WorldCom exec Vinson gets prison, house arrest. Retrieved from http://usatoday30.usatoday.com/money/industries/telecom/2005-08-05- vinson_x.htm
Office of Mental Health. (2015). Top Ten Internal Controls to Prevent And Detect Fraud!
Retrieved from https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html
Mulligan, T. & Hofmeister, S. (2004). Jury Convicts 2 in Adelphia Fraud Case. latimes.
Retrieved 10 May 2016, from http://articles.latimes.com/2004/jul/09/business/fi-adelphia9
Lanzano, L. (2005). Adelphia founder gets 15-year term; son gets 20. msnbc.com. Retrieved 10 May
2016, from http://www.nbcnews.com/id/8291040/ns/business-corporate_scandals/t/adelphia-founder-gets--year-term-son-gets/#.VzHzhE9rO1s
