In July 2004, John Rigas, the founder and former CEO of Adelphia and his son Timothy Rigas, former chief financial officer of the company, were convicted of fraud and conspiracy for looting more than $100 million from the company, for hiding more than $2 billion in debt from the public, and for lying about the company’s financial condition the to the public. 10 In June 2005, John Rigas was sentenced to fifteen years in prison for his crimes; his son Timothy was sentenced to twenty years for his role in the fraud scheme. 11

According to the SEC report, between 1999 and 2001, company executives engaged in a series of transactions to improve the company’s financial position including (1) the exclusion of $2.3 billion in debt on the Adelphia financial statements by recording Adelphia debt on the books of unconsolidated subsidiaries, (2) the issuance of false statements about the company in press releases, earnings reports, and filings with the SEC, and (3) the concealment of the use of Adelphia funds for personal use by the Rigas family including the purchase of stock and timber rights, the use of funds to construct a golf course for the family, the pay-ment of personal debt using company funds, and the purchase of luxury condominiums in Colorado, Mexico, and New York City for the family. 12 According to the complaint, the Rigases used company jets for private vacations, including an

African safari, and borrowed billions of dollars from Adelphia for their private use. John Rigas began withdrawing so much money from the company to cover his personal debts that finally his son had to limit him to $1 million per month. 13

In April 2005, Adelphia agreed to pay a $715 million fine to the SEC to settle claims relating to the corporate looting charges. The settlement is the second largest fine paid by a company to the SEC after its $750 million settlement with WorldCom. 14

a. According to the auditing standards, internal control policies should include controls necessary to provide assurance that transactions are recorded so that company expenditures are made in accordance with management and board authorizations and to provide assurance that unauthorized use of company assets has not occurred. Explain how the Rigas family’s policies violated internal control standards.

b. Did the auditor correctly assess the risk associated with this audit? How should the auditor have used the audit risk model to gather evidence for this company?