Running head: Adelphia Communications Scandal

TUI UNIVERSITY

Errol Hammonds

Case #1
ETH 501
Business Ethics and Deontology
Dr. Bonnie Adams

21 October 2013

Adelphia Communications Scandal Adelphia – which means “brothers’ in Greek – used to be one of America’s largest cable companies. John Rigas [http://en.wikipedia.org/wiki/John_Rigas] founded the company and served as CEO and chairman. His son Tim had the position of Chief Financial Officer and two other sons were VPs. John Rigas also has a son-in-law Peter Venetis who was also a board member. Of the board’s nine seats, the Rigas family held five of them. They also owned the majority of class B super voting shares that gave the family majority voting rights. It is how the family maintained control even after the company went public. In the summer of 2002, three members of the Rigas family were arrested and charged with looting the nation's sixth-largest cable-television company.

The Securities and Exchange Commission filed a complaint against the company accusing it of fraud. The charges marked the latest effort by the federal government to crack down on corporate malfeasance as public confidence and the financial markets have been battered by seemingly relentless disclosures of financial shenanigans. The scandal was discovered when the Rigases disclosed that Adelphia was responsible for more than $2 billion in loans to family-owned entities. Outside board members took control and formed a special committee to investigate the issue. The scandal was due in part to Adelphia’s large debt. Adelphia backed $2.3 billion worth of personal loans to the Rigas family. The scandal also uncovered the methods in which the Rigas family committed fraudulent acts. Rigas management manipulated the books to meet analysts’ expectations and inflate the company’s stock price. They also created private partnerships with Adelphia as a tool for self dealing schemes such as funding transfers through journal entries that gave the company more debt and the Rigas family million dollar assets at no cost.

Integrity and professional behavior are two key ethical problems raised in the Adelphia communications case. It’s easy to overlook the quality of integrity when running a business -- but incorporating it into all of your business dealings and decisions can advance your company to greater levels of success (Sheira Levine 2010). The Rigases showed a great lack of integrity both personal and buisiness by the methods in which they pilfered the company out of millions of dollars. In one instance of the complaint filed against the family, it was stated that the Rigases used company jets for private jaunts including and African safari. They also borrowed billions of dollars for their closely held companies and used millions of company funds to meet margin calls on their private stock. These actions clearly illustrate a lack of both personal and business integrity. Professional behavior or lack thereof was also an issue in this case. The family accountants are as responsible for the fraud as are the Rigases. The accountants should have complied with the current laws and regulations. Instead, the accountants were complicit in falsefying documentation of financial results for Adelphia. In 2000, it was stated in the complaint filed by the SEC that Timothy Rigas discovered that the company’s earnings before interest, taxes depreciation and amortization were below their public forecasts and instructed Adelphia employees to create ficticious transactions to boost Adelphia’s revenue, according to the complaint (Jerry Markon and Robert Frank, 2002). This is not the behavior that professional accountants should display when the lives of stakeholders are on the line.

Deontology Ethics: Deontology Ethics are concerned with what people do, not with the consequences of their actions. * Do the right thing. * Do it because it's the right thing to do. * Don't do wrong things. * Avoid them because they are wrong.
Under this form of ethics you can't justify an action by showing that it produced good consequences, which is why it's sometimes called 'non-Consequentialist'.
The word 'deontological' comes from the Greek word deon, which means 'duty'.
Duty-based ethics are usually what people are talking about when they refer to 'the principle of the thing' (BBC 2013).

Kant's version of duty-based ethics was based on something that he called 'the categorical imperative' which he intended to be the basis of all other rules (a 'categorical imperative' is a rule that is true in all circumstances.) The categorical imperative comes in two versions which each emphasise different aspects of the categorical imperative. Kant is clear that each of these versions is merely a different way of expressing the same rule; they are not different rules

The first rule places emphasis on moral rules being more universal sable. This means that you should always act in such a way that you would be willing for it to become a general law and that everyone should do the same in the same situation. Kant thought that all human beings should be treated as free and equal members of a shared moral community, and the second version of the categorical imperative reflects this by emphasising the importance of treating people properly. It also acknowledges the relevance of intention in morality.

The Adelphia case in regard to deontological ethics showed that the Rigas family acted with no concern of the consequences of their actions. The aggressive way in which they violated the company stakeholders trust gives the appearance that they felt entitled to the money they were spending. They acted opposite of what deontologist would act in the same situation. Deontologists believe in keeping with moral rules such as it is wrong to tell lies. Integrity or lack thereof on the part of the Rigas family does not fall in line with duty-based ethics. Someone who follows Duty-based ethics should do the right thing, even if that produces more harm (or less good) than doing the wrong thing: People have a duty to do the right thing, even if it produces a bad result. The Rigases also displayed a lack of professional behavior, the second ethical issue identified earlier. Both the Rigas family and the accountants of the company should have been more responsible in regards to duty based ethics. The accountants are responsible for ensuring reports or earnings are in compliance with company policy as it is a duty that must be carried out. It would seem that the accountants and the Rigas family were not concerned with the consequences of their actions.

Immanuel Kant’s Categorical Imperative is a rule for testing rules. Basically it requires the following steps: * Before you act, consider the maxim or principle on which you are acting. * Generalize that principle. * PERFORM TEST ONE.
If, once generalized, it no longer makes any sense because it contradicts itself, then it is wrong to use that maxim as a basis for action. * IF NECESSARY PERFORM TEST TWO (aka Reversibility)
If the generalized version makes sense, then ask whether you would choose to live in a world where it was followed by everyone. If not, do not act on that maxim (Jan Garrett 2006).

The Adelphia case in regard to Kant’s categorical imperative shows that the Rigas family and the accountants of the company did not consider the imperative maxim before committing fraud against the company. Ordering the accountants to falsify earning documents are an example of a false promise whereby producing erroneous earning documents yielded financial gain to the Rigas family but at company shareholders expense. In the end it can be said that good will always triumph over evil as the law caught up to the Rigas family. John Rigas, the father, was sentenced to 15 years in prison for his role in the looting and debt-hiding scandal that pummeled the company into bankruptcy. His son Timothy, was convicted of bank fraud, securities fraud and conspiracy, was sentenced to 20 years in prison. Timothy Rigas stated that“Our intentions were good. The results were not” This is a clear example of consequentialism whereby the thought of their actions would be right or wrong depended on the results of their actions.

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