AFC728 ACCOUNTING FRAUD EXAMINATIONPREPARED BY:AMEER SHAFIQ 2014617332PREPARED FOR:DR ROSZANA TAPSIRINDIVIDUAL ASSIGNMENT WRITE UPDetecting Understatement of Liability Fraud Symptoms

CASE STUDY - ADELPHIA COMMUNICATION CORPORATION

Adelphia BackgroudAdelphia 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 ArouseThe 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 : 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.

QuarterReported Shareholder'sEquity (U.S. dollars)Cumulative Amountby Which Shareholder'sEquity is Overstated/(U.S. dollars)

Q1 2000 $5,135,232 $368,000,000

Q2 2000 5,003,529 368,000,000

Q3 2000 4,974,465 513,000,000

Q4 2000 5,212,104513,000,000

Q1 2001 6,340,277513,000,000

Q2 2001 6,084,478513,000,000

Q3 2001 5,804,748513,000,000

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.

QuarterReported Liabilities(U.S. dollars)True Liabilities(U.S. dollars)Amount Removedfrom PublicCompany BooksPer Quarter(U.S. dollars)

Q2 19994,162,154,0004,412,154,000250,000,000

Q3 19994,324,424,0004,574,424,000N/A

Q4 199912,400,605,00012,650,605,000N/A

Q1 200012,478,372,00013,096,372,000368,000,000

Q2 200012,990,935,00013,387,935,000(221,000,000)

Q3 200014,083,426,00015,225,716,826745,290,826

Q4 200016,287,376,00017,468,058,51238,391,686

Q1 200117,270,883,00018,500,298,23948,732,727

Q2 200117,854,801,00019,129,787,64945,571,410

Q3 200118,604,914,00020,440,171,099560,270,450

Q4 2001N/AN/A448,159,322

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 ActivitiesAdelphia 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.

References1. 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.