AFC728 ACCOUNTING FRAUD EXAMINATION

PREPARED BY:
AMEER SHAFIQ 2014617332
PREPARED FOR:
DR ROSZANA TAPSIR

INDIVIDUAL ASSIGNMENT WRITE UP

Detecting Understatement of Liability Fraud Symptoms

CASE STUDY - ADELPHIA COMMUNICATION CORPORATION

Adelphia Backgroud
Adelphia Communication Corporation was developed by a name called John J.Rigas in 1952.
Adelphia nature of business is on communication category specifically for cable television
services headquarter in Coudersport, Pennsylvania. Gradually, Adelphia Communication
Corporation began to grow by acquiring several other cable systems in an effort to expand the
company.Adelphia biggest acquired was on 1999, when Adelphia acquired FrontierVision
Partner, Century Communication Corporation along with Harron Communication Corporation
until they was well known as the fifth largest cable company in the United States.
Scandal Arouse
The spark started when Adelphia Communication Corporation announced they were liable for
more than $2.0 billion of borrowings under three credit facilities mutually with its subsidiaries
and affiliates (in which previously they did not announced). The Rigas family claim that they use
the loan funds to purchase stock and other securities of Adelphia Communication Corporation.

Figure 1 : The Collapse of Adelphia Communication Corporation Time Frame

In response to the Adelphia Communication Corporation (ACC) publically disclosure of their
loan. United States Securities and Exchange Commision (SEC) launcehd an informal
investigation of ACC borrowings starting from previous undisclosed co-borrowing arrangements
unitl the current publically dislcosed. SEC that staterd launcehd as an informal investigation

towards ACC ended turned into a criminal investigation for various fictitious fraudulent activites.
Below is some of the fictitious activities :

Quarter

Q1
Q2
Q3
Q4
Q1
Q2
Q3

ACC Vice president of Finance, Assistant treasurer and Director of internal,

reporting intentionally collaberate submitted false information to lenders and
made false statements to the public in order to maintain stock price.
Reported Shareholder's
Equity (U.S. dollars)

2000
2000
2000
2000
2001
2001
2001

$5,135,232
5,003,529
4,974,465
5,212,104
6,340,277
6,084,478
5,804,748

Cumulative Amount
by Which Shareholder's
Equity is Overstated/
(U.S. dollars)
$368,000,000
368,000,000
513,000,000
513,000,000
513,000,000
513,000,000
513,000,000

Figure 1 above was the reported by Adelphia for each quarter from 2000 until third quarter of
200. Adelphia Communication Corporation was mask their shareholder equity by excluding their
liabilities from its balance sheet abd understate its liabilities. As a result, Adelphia overstated its
stockholders equity by the amouint of the Rigass stock acquisitions

Rigas directed ACC became guarantor for the loans of private business owned
by his family.

SEC investigation tuned out to discovered between 1999 to 2001, Adelphia

fraudulently excluded from their annual and quarterly financial statement over
$2.3billion of its bank debt.

Quarter

Q2 1999
Q3 1999
Q4 1999

Reported Liabilities
(U.S. dollars)

4,162,154,000
4,324,424,000
12,400,605,000

True Liabilities
(U.S. dollars)

4,412,154,000
4,574,424,000
12,650,605,000

Amount Removed
from Public
Company Books
Per Quarter
(U.S. dollars)
250,000,000
N/A
N/A

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

2000
2000
2000
2000
2001
2001
2001
2001

12,478,372,000
12,990,935,000
14,083,426,000
16,287,376,000
17,270,883,000
17,854,801,000
18,604,914,000
N/A

13,096,372,000
13,387,935,000
15,225,716,826
17,468,058,512
18,500,298,239
19,129,787,649
20,440,171,099
N/A

368,000,000
(221,000,000)
745,290,826
38,391,686
48,732,727
45,571,410
560,270,450
448,159,322

Figure 2 : Adelphia Communication Corporation excluded their liability.

ACC created sham transaction supported by fictitious documents intending to

stated that Adelphia actually repaid several of its debts. However, the truth was
ACC simply shifted the transaction to uncosolidated Rigas-controlled entities.
Adelphia also issued $772 million shares of Adelphia Communication
Corporation for the benefit of Rigas family by using it to satisfy personal need.
They pay for vacation properties and New York City apartments along with
pernollay used to developed a golf course on land.
On March, 2002 ACC disclosed of an estimated $2.3 billion of off-balance sheet
liabilites. Adelphia masked it by diverted $174 million of Adelphia funds to pay
personal margin loans of Rigas family members.

Adelphia Fraudulent Activities

Adelphia Communication Corporation intentionally hid their debt in unconsolidated
subsidiaries. ACC request co-borrowing credit facilities with involvement of Rigas
family owned business. They diverted this loan by divided the loan under several
other ACC unconsolidated subsidiaries. The debt among Adelphia subsidiaries was
increase but the ACC debt was decreasing. This falsely bring public and SEC to think
that the level of debt in ACC in well managed. It also gave investors the false
impression that the company was leveraging condition and paying off its debt.
Adelphia also take a step further by misrepresent in public statement along with
filings to maintain this appearance with supporting fictitious document as a proof
the debt had been repaid.
Adelphia also found to fraudulently record unmatured income as an income. For
example ACC included cable subscribers from their unconsolidated affiliates and
sometimes included customers who subscribers to internet or home security
services or other services entirely unrelated to cable. Furthermore, the company
makes up false information regarding the extent of cable plant upgrade. Thus,
inflated their earnings on fictitious management fees, record unmatured sales as
income and shifting expenses to unconsolidated affiliates.
Many of unrelated transaction mostly involved personal satisfaction such as paying
personal debt amounted $241 millions, paying $26.5 millions of timber rights to
preserve the view outside the Rigas family house and spending $12.8 millions to
build a golf course and club house. All of above expenses, none of them been
disclose to the investor and all of the money was of from company money.

References
1. Barlaup K., Dronen H. I., & Stuart I. (2009). Restoring Trust In Auditing : Ethical Discernment And
The Adelphia Scandal. Managerial Auditing Journal, Vol. 24 No.2.
2. Comission, S. E. (2002, July 24). Complaint : SEC V Adelphia. Opgeroepen op November 1,
2014, van Security Exchange Comission Web site:
http://www.sec.gov/litigation/complaints/complr17627.htm
3. P, K. V., Zhou, M., Flood, T., & B, J. (2007, June). Three Cases of Corporate Fraud : An Audit
Perspective. Working Paper Series, p. 94.
4. S, H., & S, A. G. (sd). In Re Adelphia Communicaiotions Corp.