Adelphia Communications’ Case Short Summary

For this case study we are asked to draw upon deontological ethics, and discuss how Adelphia Communications’ executives violated the trust of the company’s shareholders and the trust of that of the larger public. To do this we first need to take a look at deontological ethics and how the philosophy of deontological ethics affects the choices that were made in the Adelphia Communications’ case. We will also look at the Adelphia case and examine how its executives violated the trust of the company’s shareholders and that of the public.

So what is the philosophy of deontological ethics? Theories in this category address the question of what makes one’s actions right and another’s wrong irrespective of the consequences of the action. It emphasizes what is the right thing to do rather than what is the good thing to do. The term deontological derives from the Ancient Greek word for “duty” which neatly encapsulates this approach. So the premise of this theory seeks to justify our obligation to behave in some ways and not in others. Further more the essence of deontological ethics is that an action’s moral value is independent of its consequences. An actions moral value depends on whether the motivation was to ones duty. (Duska and Duska 2003). According to this theory, there is only one possible action, the fair thing to do. Which means that all of us have the duty to take the right action.

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Did Adelphia’s executives take the right actions? Were their actions moral? Were the actions they took motivated by ones duty? To find the answers we need to look closely at the Adelphia Communication’s scandal. The following is some needed background information on the company.

John Rigas and two partners formed Adelphia in 1952. He bought out the partners and expanded his business with his brother and, later, his sons. On July 1, 1986, the company was publicly listed. Five cable television companies owned by the Rigas’ were reorganized into one company (Adelphia, 1994). The public listing meant that Adelphia had to follow different regulations than for a family company. Adelphia was now required to make annual reports and have them approved by an auditor before filing them with the SEC. The company was required to have a Board of Directors and hold annual general meetings. By the time the Adelphia scandal broke in 2002, Adelphia was the sixth largest cable company in the United States. The annual revenue was $2.9 billion, and the company had 5,547,690 subscribers. Including subsidiaries, the company was located in 32 states and Puerto Rico (Adelphia, 2000). After the revelation of the scandal, Adelphia filed for Chapter 11 bankruptcy protection on June 25, 2002. It continued to operate under bankruptcy protection until The Federal Communications Commission approved the purchase of the company by Comcast Corp. and Time Warner Inc. (in July 2006) (The Wall Street Journal, 2006).

The Adelphia case is one of the most extensive ever on record, concerning a public company committing fraud. The SEC complaint against Adelphia stated that from at least 1998 through March of 2002 Adelphia systematically and fraudulently excluded billions of dollars in liabilities from its financial statements by hiding them in the books of off balance sheet affiliates. Adelphia also went a step further by inflating earnings to meet Wall Street standards. They also falsified operations statistics, and concealed self-dealings by the Rigas family that controlled Adelphia Communications.

Despite SEC regulations, as Adelphia was a publically held company, the Rigas family continued to use Adelphia funds and investors money to perpetuate their lavish lifestyle. The Cash Management System (CMS) implemented within Adelphia Communications provided the Rigas family, namely John Rigas ample opportunity for self dealing, which as stated above was made it possible to conceal fraudulent misrepresentation and omission of material facts. The pattern was that the family would borrow the funds for personal use with intent to repay the funds at a later date in time. The family used the Adelphia CMS system to withdraw money for personal expenses, capital expenditures, repayments of personal debt and other uses. The amounts were disclosed as small footnotes in the company’s filings.

In the early 2000’s there was increasing focus on corporate governance and overall business ethics after some major business scandals such as Enron. It would only be a matter of time before Adelphia Communications and the Rigas family were under the microscope themselves.

On April 1, 2002 Adelphia announced that it would delay filings of the company’s annual report to the SEC, stating that it needed time to review specific accounting items related to the co-borrowings. About this time major stockholders pressured the company to sell off some of their major assets and merge the entire company to cover the debts. Investigations by the SEC had reveled major flaws in the corporate governance of Adelphia. They found evidence suggesting that corporate money had also been used to finance a golf course built on the Rigas private property, to buy timber rights for the family and to finance a local hockey team. The family also used company property as if it wee their own, and to take personal vacations using the company planes and spent millions of dollars to fund Ellen Rigas film production company. As you can clearly see the Rigas family committed several ethic violations, two of the major violations pointed out in the case involve private use of company funds, and misuse of company assets such as company property and corporate planes. In essence the Rigas family defrauded the company, their shareholders and the general public when they made the choice to execute these acts. So what makes these acts wrong? As I have stated previously, according to Deontological ethics we have a “duty” to act ethically in all maters.

So the premise of this theory seeks to justify our obligation to behave in some ways and not in others. Further more the essence of deontological ethics is that an action’s moral value is independent of its consequences. An actions moral value depends on whether the motivation was to ones duty. So its clear that under the theory of deontological ethics the Rigas family acted unethically. They had a duty to their company, shareholders and the common public to not only act ethically, but also had legal responsibilities which they violated. By their very acts of they have proven that they have no ethical or moral fiber. Every shareholder was personally and financially affected, employees were also harmed, and the general public was mislead and damaged by their fraud and greed. According to Kant’s Imperative if your motivation is not ethical, then the action itself will not be ethical. Therefore the Rigas use of company funds and assets was not ethical. One can only speculate why the Rigas family felt it was ok to use company funds and property as their own, or did they? Buy attempting to conceal their actions they obviously knew it was illegal, if not unethical. Yet one unethical decision lead to another, followed by a series of unethical actions. Perhaps at some point they felt since they were getting away with it for the moment that it was ok for them to continue to do these things. Another thought comes to mind when the philosophy of ethics is taken into consideration. If something is illegal is it also unethical? For if it is illegal it is considered an unethical act against another person or society, is it not? If I were o apply Kant’s Imperative and Deontological Ethics to a legal matter one would have to gather that yes, it is unethical in both cases. In September a federal grand jury indicted the three members of the Rigas family together with James R. Brown and Michael C. Mulcahey.

This was one of the largest cases ever involving insider trading and company fraud (Markon, 2002). The government’s case against the Rigas’ strengthened when James R. Brown, Adelphia’s former vice president of finance, pleaded guilty to one count each of conspiracy, securities fraud and bank fraud. Brown agreed to testify against the members of the Rigas family (DeBaise, 2002). If Rigas had used these models in his decision making process would he have come to a different conclusion? I guess we will never know. Even as John Rigas was questioned in these matters he continued to stand by his actions, so again I have to ask, did he really believe that his actions were ethical and he did his “duty” to the company, shareholders, the public and his family, or was he just pulling another unethical move to prove his innocence? Oh what a tangled web we weave…

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.

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