The Adelphia Communications scandal occurred in March, 2002 when three of the original founding family members which included the father John Rigas, and two of his sons Michael and Timothy, along with two other company executives were arrested for improperly taking assets from the nation’s sixth-largest cable television company. The scam involved one of the biggest financial frauds faced by a publically held company. In the end stakeholders were forced to absorb massive losses as their shares in stocks fell sharply.
The Rigas family hid billions of dollars in debts by falsifying its financial records, and blatantly lying to their investors about it. They recklessly spent millions of dollars of company funds that rightfully belonged to the company and its shareholders. They not only looted Adelphia by using its company jets and other assets for personal use but they refused to record any of their self-indulgent expenditures on public records. In short the company got into financial trouble as a result of poor corporate governance and improper accounting practices. (Markon & Frank, 2002). We will discuss a couple of key ethical problems such as how Adelphia executives fixed the books in order to deceive the public and stockholders, and how they used the company as their own person “ATM” machine in order to support their extravagant lifestyles. We will go on to discuss and focus on what is meant by the duties and rights of deontological ethics and how Kant’s Categorical Imperatives might be applied to both those issues. Finally, we’ll take a look at what a deontological framework of business ethics looks like and how applying it to the two problems mentioned above might have made a difference for both the Rigases and Adelphia.
Two key ethical problems
The first key ethical problem raised in the Adelphia Communications scandal that we shall discuss is the fact that the Rigas family engaged in a mass cover up which included one of the family members namely, Timothy Rigas who was accused of falsifying financial records when he was discovered that Adelphia’s earnings were below their public forecasts. He then quickly instructed his employees to create fictions transactions to boost Adelphia’s revenues so that the company would look stronger than it actually was to stockholders; as reported in an article written by (Markon & Frank, 2002). Part of the reason they were able to conceal their illegal activities for as long as they did was because the board of directors consisted mostly of family members which comingled company funds with the Rigases family Entities by way of using Adelphia’s” Cash Management System”. They not only had complete control over the books but the CMS further added to their opportunity to commit the fraud they did.
The next ethical problem was the massive looting done by the Rigases in order to support their extravagant lifestyles. Even though the official books only reflected that John Rigas was being paid a mere $1.9 million annually he had somehow accumulated more than $66 million in personal debt and was withdrawing so much money from the company as the former CEO, that his son was forced to step in and restrict him to only taking out $1 million a month; which he did for a consecutive 13 months. They used three of the company jets for lavish vacations at the company’s expense as well as other company owned property rent free. Still, John Rigas managed to spend an additional $12.8 million dollars of company funds to construct a golf course on his family owned property and did so without permission from the company and he have any intentions of repaying any of the money back as reported in an article written by (Barlaup, Hanne & Stuart, 2009) Deontological ethics and Kant’ Categorical Imperatives
Deontological derives from the Greek word “deon” or duty in view of the foundational nature of our duty or obligations; and consequences do not matter. In other words deontology is a moral theory and defines morality in terms of personal responsibilities and duties. For example, it is our moral duty to not to steal. The second duty is the right’s theory, which is a justified claim against another person’s behavior. Rights and duties are related in way that it implies the rights of one are the duties of another. (Johnson, R. 2008). For example, if I work for you then it is my right to be compensated and at the same time it is your duty to pay me. Therefore it is our duty to always do the right thing which is why it is considered to be universal law.
Categorical Imperative in Kant’s version of the duty-based ethics he intended it to be the basis of all other rules; a ‘categorical imperative’ is a rule that is true in all circumstances. In Kant’s formula the universal law states that we ought to act in conformity with that maxim, and that maxim only, which can at the same time, will to be a universal law (Pecorino, P. 2000). In other words it says that something could only be a moral law if it applied to everyone. For example stealing, we don’t think stealing is good because we certainly wouldn’t want others stealing from us because if they did then we wouldn’t know how to trust anyone and it would be destructive to both our society and our economy. Deontological framework
Falsifying financial documents when we apply the deontological framework of business ethics to the problem of falsifying financial documents we must first recognize the importance of the decision making process. Since decisions often affect more than the people making them, it is important to first ask a few questions that could help us come to reasonable decision. For example, we could ask if the conflict, situation or decision would be damaging to others or the community; or ask whether the issue go beyond legal or intuitional concerns; and what impact might there be on their dignity, rights or hopes of others before making certain these decisions. (Barlaup, Hanne & Stuart, 2009). To decide whether falsifying financial documents is a conflict or not we should ask if this decision could possibly bring harm to anyone? In this case the answer would be yes, the harm would be towards the integrity of company, its employees and the general public. This problem would also hurt investors by causing massive financial losses. The next questions we ask is whether or not this issue goes beyond any legal concerns or not? Could choosing to conceal debts and faking receipts cause legal problems? In this case it is called fraud and is against the law. They deceived the public and this was not an ethical thing and according to deontological theory this clearly would be labeled as an immoral action and should never be done.
Looting company funds by applying the deontological framework of business ethics to the problem of how the family used company money and property to support their excessive lavish lifestyles, we ask the following ethical questions. First would we thing that using the company’s private jets and other company owned property for personal use to ever be considered right? What about spending $12.8 million dollars of company funds the way John Rigas did in order to construct a golf course on the Rigases own property? Would that be beneficial to the company or bring harm to it and would there be any illegal aspects to doing so? Clearly if John were to think ethically he would have decided that the decisions he made would have benefited far less people than it could actually benefit the majority especially considering the number of investors that owned shares in the company. Therefore using the deontological theory again would have proved to be unethical. Applying Kant’s Categorical Imperative
Falsifying financial documents
Kant believes that the fundamental principal of our moral duties are a categorical imperative because it commands us to exercise our wills in a particular way and involves the principal of universalizability as stated in the article by (Johnson, 2008). In applying Kant’s categorical imperative to the team of auditors from the Deloittes group, we think they would have automatically reported the problems that they noticed at Adelphia on day one. According to AICPA Code of Professional Conduct; the code of professional conduct requires auditors to act in a way that will serve public interest and require its members to perform all professional responsibilities with highest sense of integrity. ( Barlaup, Hanne & Stuart, 2009). Their conduct was morally and ethically wrong and considered a form of lying. If everyone universally were to lie in such a way then our financial markets would not be as they are today. They currently operate based on trust, meaning they rely on the information being reported to them to be accurate so consumers are better able to make wise invest decisions. If it was acceptable to falsify financial records then the financial markets would be in deep trouble and the economy as we know it would collapse. Looting company funds
According to Kant’s C. I. it states that looting from a company is considered stealing and stealing is always considered to be universally wrong. Using the company assets should have been recorded on the books without exception because it was the right thing to do and it is what we as a society expects to be done. If John Rigas wanted to use company funds to build his golf course then he should have brought it before the board and got permission or better yet he should have done a cost analysis and used his own money for the project because that was the right and reasonable thing to do. Conclusion
In conclusion we have discussed how the Adelphia ‘s executives ran into problems by illegally falsifying their accounting books in order to deceive the majority by using the company as their own person “ATM” machine. We then focused on what was meant by the duties and rights of the stockholders by defining what deontological ethics and Kant’s Categorical Imperatives theories meant and then applied them to both those issues. Finally, we learned how to apply a deontological framework of business ethics to the two problems mentioned above and discovered that using an ethical framework adds a critical dimension to business leaders in their decision making process by giving them guidelines to follow. We also discovered that it is imperative that we all follow the universal law of being trustworthy and honest in all our business dealings in order that we enjoy a stable and strong economy.
Barlaup, K., Hanne, I. D., & Stuart, I. (2009). Restoring trust in auditing: Ethical discernment and the Adelphia scandal. Managerial auditing journal, 24(2), 183-203. Retrieved from http://dx.doi.org/10.1108/02686900910924572
Johnson, R. (2008). “Kant’s moral philosophy”, The Stanford encyclopedia of philosophy (summer 2012 edition), Edward n. zalta (ed.), Retrieved from http://plato.stanford.edu/archives/sum2012/entries/kant-moral.
Markon, J., & Frank, R. (2002, July 25). ). Leading the news: Five Adelphia officials arrested on fraud charges — three in the Rigas family, two other executives held, accused of massive looting. Wall street journal. r. Retrieved from http://search.proquest.com/docview/398878022?accountid=14375
Pecorino, P. (2002, November 12). The categorical imperative… Retrieved from http://www.qcc.cuny.edu/socialsciences/ppecorino/intro_text/Chapter 8 Ethics/Categorical_Impera