ETHICS IN ACCOUNTING 1
Finding the solutions to the ethical dilemma facing the AdelphiaCommunication Corporation with the use of the Mintz& Morris (2008) ten steps.
Frame the ethical issue
Is the Rigas’ family exclusively liable for the fraudulentundertakings that led to the bankruptcy of the Adelphia CommunicationCorporation?
Gather all facts
On March 27, 2002,$2.3 billion was reported in off-balance sheet debt that had beenundisclosed in the firm’s financial statement.
The Rigas’diverted $174 million and other huge amounts of money from thecompany finances to settle a personal margin loan.
Deloitte &Touche an auditing firm to the Adelphia failed to detect thefraudulent activities that culminated in the bankruptcy of the firm.
Over 450 banks aswell as other financial institution granted loans to the Adelphia’sfounders and accepted the company as the guarantor.
Identify the stakeholders and obligations
Deloitte & Touche (D&T) was the company’s former auditorfirm to Adelphia Corporation.They should have noted theirregularities and the fraudulent undertakings by the Rigas.`
The 450 banks and other financial institutions charged by theAdelphia’s Bondholders for fueling the fraudulent activities by theRigas. These institutions gave loans worth billions of dollars to thefounders of Adelphia Communications in the name of the company.
Identify the relevant accounting ethical standards involved in the situation
Duty to Care. The Deloitte & Touche owed the duty to careto its client Adelphia Corporations.
Integrity. It entails actions with principle behavior. The 450banks and other financial institutions that gave loans to Adelphia’sfounders ought to have considered their professional standards andnot the needs of a few individuals.
Identify the operational issue
Did the otherexecutive members question the fraudulent undertakings by the Rigas’family?
Are there any rulesfor the CEO or founder of Adelphia to borrow money in the name of thecompany?
Who else had thepower to oversee the CEO’s decision?
Was there anin-house auditing committee in the company.
Identify the accounting and auditing issue
Issuance of loans toindividuals without the approval of the company’s board ofgovernance.
The transfer of thecompany’s finances to individuals accounts without record oragreement.
Failing to detectthe scandalous action taking place in the Adelphia Company by itsauditing firm.
List all the possible alternative that you can or cannot do
Hold the Rigasexclusively liable for the loss the Adelphia CommunicationCorporation experienced.
Do not hold theRigas family as exclusively liable.
Hold the auditingcompany liable for failing to detect the erroneous financialstatements.
Do not hold theauditing company accountable for its failure to detect the fraudulentactivities by the Rigas.
Hold to account thefinancial institutions that gave loans to the Rigas’ family usingthe company as the guarantor.
Do not hold toaccount the financial institutions such as the 450 banks for the lossthe company incurred as a result of their actions of approvingpersonal loans to the Rigas.
Compare and weighs the alternative
Holding the Rigas as exclusively liable for the company`s bankruptcywill leave other people that may have been involved in the scandalousactivities off the hook. Failing to hold the Regas exclusively liablefor the company’s woes will result to all individuals that wereinvolved paying for their commission or omissions.
Holding the auditing company liable for failing to detect theerroneous misrepresentation of the company’s financial report willinitiate an investigation into their level of expertise as anauditing company. If the auditing company is not held accountable, itmay cause a downfall of other companies due to its inability toexecute the duty to care.
Hold the financial institutions accountable. This will send a warningto all financial institutions substituting the accounting code ofethics for the personal interest of certain unscrupulous individuals.Failure to bring the financial institution to account will bejeopardizing the trust companies have on them.
Decide on a course of action
To bring the company back to its feet, certain individuals ought tobe held accountable. They include the auditing company that failed todetect the unscrupulous activities taking place in the financialreports of its client. The financial institutions ought to be broughtto account for infringing on the trust the company had on them bygranting loans to Rigas’ for personal enterprises and accepting thecompany as the guarantor.
Reflect on your decision
It is evident that the Rigas were not alone in planning and executinga project aimed at siphoning the company of its resources. Whileother stakeholders may not have been involved directly, theirnegligence and omissions amounted to them acting as accomplices tothe plan. In so doing, not only will the company regain its moneyback, the move will also prevent other companies from facing asimilar scenario in the future.
Mintz, S. M.,& Morris, R. E. (2008). EthicalObligations and Decision-Making in Accounting: Text and cases.New York, NY: McGraw-Hill/Irwin