The objective of this case study is to examine the breach of trust committed by Adelphia Communications’ executives towards both shareholders and the general public. Our analysis will be conducted from a deontological ethics perspective, investigating how these moral principles impacted decision-making in the Adelphia Communications’ case. Moreover, we will scrutinize the precise actions executed by the company’s executives that led to a betrayal of trust towards shareholders and the public.
Deontological ethics examines theories that address the morality of actions, regardless of their consequences. It prioritizes what is considered right over what is deemed good. The term “deontological” originates from the Ancient Greek word for “duty,” encompassing the approach of justifying our obligations to behave in specific manners. Essentially, deontological ethics asserts that an action’s moral value relies not on its outcomes but on its alignment with one’s duty. According to this theory, individuals have a sole obligatory course of action to follow.
To determine the ethicality, suitability, and sense of accountability behind Adelphia’s executives’ actions, it is essential to evaluate the scandal associated with Adelphia Communications. The subsequent information offers contextual information regarding the organization:
Adelphia, founded by John Rigas and two partners in 1952, experienced expansion with the involvement of Rigas’ brother and later his sons. In 1986, Adelphia went public by merging five cable television companies owned by the Rigas family into one entity (Adelphia, 1994). This transition subjected Adelphia to new regulations such as creating annual reports, getting them approved by an auditor, and filing them with the Securities and Exchange Commission (SEC), which were not applicable when it was privately owned. Additionally, Adelphia had to establish a Board of Directors and hold yearly general meetings.
By the time the Adelphia scandal emerged in 2002, it had grown to become the sixth largest cable company in the United States. It had an annual revenue of $2.9 billion and served 5,547,690 subscribers across 32 states and Puerto Rico (Adelphia, 2000). In response to this scandal’s revelation, Adelphia filed for Chapter 11 bankruptcy protection on June 25th of that year. Despite operating under bankruptcy protection for several years thereafter, its acquisition was eventually approved by Comcast Corp. and Time Warner Inc., as sanctioned by the Federal Communications Commission in July 2006 (The Wall Street Journal, 2006).
The Adelphia case is one of the largest and most comprehensive in history, as it pertains to a public company involved in fraudulent activities. As stated in the SEC complaint against Adelphia, they engaged in a systematic and fraudulent scheme to conceal billions of dollars worth of liabilities from their financial statements between 1998 and March 2002. This was accomplished by concealing these liabilities within the books of off balance sheet affiliates. Furthermore, Adelphia artificially inflated their earnings in order to meet Wall Street’s expectations. They also falsified operational statistics and hid self-dealings carried out by the Rigas family, who held control over Adelphia Communications.
Despite SEC regulations, the Rigas family, who were affiliated with Adelphia, a publicly held company, continued to utilize funds from Adelphia and investors to sustain their extravagant lifestyle. The implementation of the Cash Management System (CMS) within Adelphia Communications provided ample opportunity for the Rigas family, particularly John Rigas, to engage in self-dealing. This system allowed for the concealment of fraudulent misrepresentations and the omission of crucial information. The family’s modus operandi involved borrowing funds for personal use with the intention of repaying these amounts at a later date. Through the Adelphia CMS system, they withdrew money for personal expenses, capital expenditures, debt repayments, and other purposes. These transactions were disclosed as insignificant footnotes in the company’s filings.
In the early 2000’s, there was a growing emphasis on corporate governance and business ethics following notable scandals like Enron. It was inevitable that Adelphia Communications and the Rigas family would also face scrutiny.
On April 1, 2002, Adelphia announced a delay in the filing of its annual report to the SEC. The reason for this delay was the need to review certain accounting items related to co-borrowings. During this time, significant stockholders urged the company to sell off major assets and merge with another company in order to cover debts. The SEC investigations into Adelphia’s corporate governance revealed serious flaws. These investigations uncovered evidence indicating that corporate funds were used for various personal purposes, such as financing a golf course on the Rigas family’s private property, purchasing timber rights, financing a local hockey team, and funding Ellen Rigas’ film production company. It was also discovered that the family utilized company property for personal use, including using company planes for vacations. The actions of the Rigas family clearly violated ethical standards, particularly in relation to private use of company funds and misuse of company assets. In essence, they defrauded the company, shareholders, and the general public when they made these choices. According to Deontological ethics, it is our “duty” to act ethically in all matters.
The theory of deontological ethics justifies and discourages certain behaviors. It asserts that the moral value of an action is determined by duty and motivation, rather than its consequences. When applying this theory to the actions of the Rigas family, their behavior can be deemed unethical as they neglected their responsibilities towards their company, shareholders, and the general public. Their actions not only violated legal obligations but also caused harm to shareholders, employees, and deceived the public. According to Kant’s Imperative, if one’s motivation lacks ethical considerations, then the action itself cannot be ethical. Hence, their utilization of company resources for personal gain was considered unethical. Although it remains unclear why they made this decision or whether it was intentional, their attempts to conceal these actions indicate awareness of their illegality and unethical nature. This pattern continued with each unethical decision leading to another in a series of such actions. They may have believed that since they had been getting away with it thus far, continuing these behaviors was acceptable. Reflecting further on ethics raises questions about whether an illegal act is inherently unethical towards others or society as well?When examining a legal situation through the lens of Kant’s Imperative and Deontological Ethics, the outcome remains consistent – it is deemed unethical in both cases. In September, the Rigas family members, James R. Brown, and Michael C. Mulcahey faced charges brought forth by a federal grand jury.
This was one of the largest cases ever involving insider trading and company fraud (Markon, 2002). The government’s case against the Rigas’ was reinforced by James R. Brown’s guilty plea to conspiracy, securities fraud, and bank fraud. Brown also agreed to testify against the members of the Rigas family (DeBaise, 2002). If Rigas had utilized these models in his decision-making process, would he have reached a different conclusion? We may never know. Even while being questioned, John Rigas remained steadfast in his defense, raising the question of whether he genuinely believed his actions were ethical and in the best interest of the company, shareholders, the public, and his family, or if he was simply attempting to further his claims of innocence. What a complicated situation we find ourselves in…
References
1. 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 on October 12, 2013.
2. DeBaise, C. (2002), “Ex-Adelphia aide pleads guilty. To testify against rigas family”, The Wall Street Journal, November 15.
3. Duska, R.F. and Duska B.S. (2003), Accounting Ethics: Foundation of Business Ethics, Blackwell Publishing Ltd., Oxford, UK.
4. Markon, J. (2002), “Adelphia ex-officials are indicted”, The Wall Street Journal, September 24.
5. The Wall Street Journal (2006), “FCC Clears $17 Billion Purchase of Adelphia”, The Wall Street Journal, July 14.
