On June 20, 2005, “John Rigas, the 80-year old founder of Adelphia Communications Corp., was … sentenced to 15 years in prison and his son Timothy, the exfinance chief, got 20 years for looting the company and lying about its finances.”1 These were the largest sentences handed out to CEOs and CFOs after SOX and before the sentencing of Bernard J. Ebbers, CEO of WorldCom, and Dennis Kozlowski, CEO of Tyco, and before the trial of Richard Scrushy, CEO of HealthSouth.

John and Timothy Rigas had faced a maximum sentence of up to 215 years each, but John’s age, bladder cancer, and heart condition were taken into account.

His lawyer argued as well that John had been very generous with Coudersport, his hometown, but Judge Sand responded, stating that what Rigas had done, “he had done with assets and by means that were not appropriately his.… To be a great philanthropist with other people’s money is really not very persuasive.”2 Adelphia was founded by John Rigas in 1952 in Coudersport, Pennsylvania, and incorporated in 1972. The company started as a cinema business that transformed into a cable television provider. By 1988, Adelphia had more than 2 million customers in the cable television service. The company also expanded rapidly into a new line of telecommunications products and services (e.g., high-definition television, video on demand, high-speed Internet, and home security). By 1989, Adelphia more than doubled its reach through acquisitions, extending into forty-one states and serving more than 5 million customers. At its peak, Adelphia employed 14,000 people in the United States.

Members of the Rigas family held four seats on the firm’s seven-member board.

John Rigas (chairman and CEO), his son Timothy Rigas (CFO), and Michael Rigas

(vice president of operations) had control of the firm and access to its resources beyond the oversight mechanisms of its Board of Directors. In essence, they used Adelphia as their own family piggy bank, withdrawing funds when they needed for their own purposes, such as golf club construction, property purchases, and stock dealings, as noted in following sections........

Questions:-

1. What breaches of fiduciary duty does the Adelphia case raise?
2. Why do you think the Rigas family thought they could get away with using Adelphia as their own piggy bank?

3. What allowed the Rigas family to get away with their fraudulent behavior for so long?
4. What concerns should have been raised in the following areas of risk assessment in Adelphia’s control environment:
integrity and ethics, commitment, Audit Committee participation, management philosophy, structure, and authority?
5. What concerns should have been raised in the following areas of risk assessment in Adelphia’s strategy: changes in operating environment, new people and systems, growth, technology, new business, restructurings, and foreign operations?
6. What is your opinion on the importance of independence in corporate governance?
What are the most recent rules on corporate governance for public firms?
7. Discuss which changes could be done to the Adelphia’s control system and corporate governance structure to mitigate the risk of accounting fraud in future years.
8. What is the auditor’s responsibility in case of fraud?
9. What is the proper audit procedure to ensure the following?

a. Completeness of liabilities in the financial statements

b. That all the related parties have been included or disclosed in the consolidated financial statements 10. Do you think analytical procedures would aid the detection of fraud?
What is the responsibility of the auditor applying analytical procedures?
11. What should the 450 lending institutions have done to protect themselves from subsequent lawsuit?