John Rigas founded Adelphia Communications Corporation with a $300 license in 1952, took the company public in 1986, and built it into the sixth largest cable television operator by acquiring other systems in the 1990s. As the company grew, it also expanded into other fields. It operated a telephone business, a sports radio station, a sports cable channel, and many other smaller subsidiaries. Despite being a publicly held firm, the company remained a family-run business; five of the firm’s nine board members were Rigas family members who also held various executive posts. John was the CEO and chairman of the board. His sons, Tim (CFO), Michael (VP of operations), and James (VP of strategic planning), made up much of the firm’s leadership team. In addition, John Rigas’s son-in-law sat on Adelphia’s board of directors. The company filed for bankruptcy in June 2002 after it disclosed $2.3 billion in off-balance-sheet debt. The Rigases are among a number of former corporate executives who have faced criminal charges since Enron's fall in 2001 touched off a series of white-collar scandals.
At Johns trial, prosecutors said the Rigases used complicated cash management systems (CMS)
to spread money around to various family-owned entities to cover stealing about $100 million for themselves. Rigas Entities consisted of approximately 63 different entities organized as partnerships, corporations, or limited liability companies exclusively owned or controlled by members of the Rigas family. Adelphia managed and maintained virtually every aspect of the approximately 14 companies comprising the Rigas Cable Entities, including maintaining their books and records on a general ledger system shared with Adelphia and its subsidiaries. Adelphia and the Rigas Entities participated jointly ina CMS operated by Adelphia, which resulted in commingling funds among the participants and greatly facilitating the fraud at Adelphia.
A complaint filed by the SEC stated:
The commission charges that Adelphia, at the direction of the individual defendants: (1) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them in off-balance sheet affiliates; (2) falsified operations statistics and inflated Adelphia’s earnings to meet Wall Street's expectations; and (3) concealed rampant self-dealing by the Rigas Family, including the undisclosed use of corporate funds for Rigas Family stock purchases and the acquisition of luxury condominiums in New York and elsewhere. The Commission seeks a final judgment ordering the defendants to account for and disgorge all ill-gotten gains including. . . all property unlawfully taken from Adelphia through undisclosed related-party transactions.!!
The SEC also alleges that since at least 1986, Adelphia improperly netted, or offset, related arty payables and related-party receivables as of year-end. As a result of this offset, gross related-party receivables of $1.351 billion and gross related-party payables of $1.348 billion were reported as a mere $3 million net receivable.!?
Required:
1. Review SFAS No. 57, “Related Party Disclosures” (available on the FASB’s Web site:
www.FASB.org).
2. Use EDGAR (www.SEC. gov) to access the 2000 Form 10-K for Adelphia Communications Corporation. Examine Adeiphia’s balance sheet and locate a line item called Related-party receivables—net. Next, look up and read the “related-party” footnote (note 13). Do you believe that this footnote adequately explains the nature of these related-party receivables or meets SFAS No. 57° disclosure requirements? Justify your answer.
3. What is the significance of Adelphia’s treatment of related-party receivables and payables and the company’s failure to adequately disclose its related-party transactions?
4. Why is it important that companies disclose related-party transactions?