A Corporation and its Operations
A corporation is a company that is allowed to operate as a solitary unit, as stipulated by the law. They are categorized on the legal grounds based on whether they are profit-making or they can offer stocks or not. They carry out their core businesses based on provisions of the law and the corporations’ own enabling provisions. However, if managed poorly can face financial challenges as well as civil lawsuits and bad publicity that can result in winding up the firm (Giroux 1207). This discussion is aimed at examining Adelphia corporations, operations, and the activities by its management that brought it to bankruptcy.
Adelphia Communications: Background and Growth
Adelphia Communications was founded by John Rigas and his brother Gus Rigas in 1952 as a cable television provider. Its headquarters were in Coudersport Pennsylvania until the headquarters were shifted to Colorado after filing for bankruptcy. It provided digital cable, high-speed internet access, and telephone services at its peak. Its growth was possible thanks to the fact that at the time it joined the cable television industry was in its infancy and John had a small claim in the firm. It took years before the Rigas’ family could have a major control of the firm and its operations (Lockman " Sarvey 24). In the 1990’s, Adelphia acquired other firms such as Frontier Vision Partners L.P. and Harron Communication Corporations Cable Systems.
The Rise and Scandal of Adelphia Communications
All these acquisitions were instrumental for the rise of Adelphia as a key player in the communication sector. The firm which had over 5.6 million subscribers by January 2002, with financial experts projecting another successful year for the now big player in the communications industry. It was by then in a good position to merge with another industry player as per reports from financial analysts. However, in March 2002, a scandal broke out with reports that the Rigas family by the use of a private trust, Highland Holdings, and other family business units had taken 2.3 billion previously unrecorded debts through various borrowings (Giroux 1206).
Financial Malpractices and Fraud
With the information in the public domain that the firm had unrecorded debts, there was an immediate shift in the stock market as the company’s stocks plunged by 70 percent. Under the loan agreements, the company could be liable to pay the loans in case the other family entities were unable to repay. The following revelations and investigations by the Securities and Exchange Commission (SEC) revealed extensive financial malpractices and fraud. The Rigas family in a bid to acquire the firm’s control had spent much of the loan to purchase more of the company’s stock (Barlaup et al. 187). The firm’s management had also misused company finances and properties by acquiring office furniture from another family entity at inflated prices, the misuse of the company planes, payment of the family’s staff, chef through company funds and the construction of a private golf course. Finally, the firm’s accounting transactions were manipulated and revenues were overstated to project the firm in a positive light.
The Aftermath and Bankruptcy
The effects of the scandal were devastating to the company. In order to regain lender and investor confidence, a committee composed of directors and creditors pressured the Rigas family to relinquish control of the company (Barlaup et al. 192). The first step after the takeover by the independent board was to restore the firm to its financial position by selling off assets and renegotiating with lenders to stabilize the firm’s finances. It, however, proved difficult for the firm to regain its footing in the cable business and on June 25, 2002, the firm filed for Chapter 11 bankruptcy.
Charges and Convictions
In July 2002, the Securities and Exchange Commission filed charges against Adelphia communications, the founder John Rigas, sons and two senior executives. The firm was charged for ‘fraudulently excluding billions of debt from its consolidated financial statements and hiding the debts in the balance sheets of affiliate units’ (Giroux 1210). It had also falsified operation statistics and inflated earnings in order to meet Wall Street analysts’ expectations and it had also concealed information about self-dealing by the Rigas family including misuse of company funds for personal luxuries.
Conflict of Interest and Convictions
There was a conflict of interest in the firm where the chief financial officer was John Rigas’ son Timothy. The family had major voting power in the boardroom having five out of nine votes belonging to the Rigas family. The five Rigas family members held class B voting power as compared to the public which had class A stock, making them decide who was voted to the board of directors.
In 2004, John Rigas was convicted of bank fraud charges and in June 2007 he was sentenced to 15 years together with Timothy for 17 years. The firm’s executives James Brown and Michael Mulcahey were accused of aiding the concealing of $2.3 billion from corporate investors in liabilities and misusing the money (Kennedy 9). Timothy Rigas, Michael Rigas, and James Brown were also accused of making false statements in press releases to inflate the firm’s subscriber’s numbers and the capacity of the firm to rebuild or upgrade as well as the financial position of the company.
Work cited
Barlaup, Kristine, Hanne Iren Drønen, and Iris Stuart. "Restoring trust in auditing: Ethical discernment and the Adelphia scandal." Managerial Auditing Journal 24.2 (2009): 183-203.
Giroux, Gary. "What went wrong? Accounting fraud and lessons from the recent scandals." Social research (2008): 1205-1238.
Kennedy, Kristin A. "An Analysis of Fraud: Causes, Prevention, and Notable Cases." (2012).
Lockman, Brian, and Don Sarvey. Pioneers of Cable Television: The Pennsylvania Founders of an Industry. McFarland, 2005.
