Adelphia Communication Scandal
The field of ethics concerns the distinction of what is good from that, which is bad. Ethics informs the correct action that one ought to take in a particular situation. The field of business ethics has gained much interest in recent times as scholars and researchers attempt to find ways of ensuring that businesses operate in an ethical manner and that all the stakeholders are protected (Mizzoni, 2010). The essay that follows will attempt to apply the various ethical theories in a bid to explain how the Adelphia communication scandal occurred.
Summary of the Case
The Adelphia Communication scandal is recorded in the annals of audit entry as one of the biggest insider trading fraud of the 21st Century. This fraud was perpetuated by a group of six individuals that included the Founder of Adelphia, his two sons, and three other officers of the company. Adelphia was a one of the leading cable TV providers in the US in the early 2000s. The family business, which was jointly owned by John J. Rigas and his two sons, went public in 1986 but the owners continued to function as though the business was still under private ownership. This conduct led to the commission of fraud in the company (Markon, & Frank, 2002).
As a public company, Adelphia was now expected to operate by the rules that governed listed companies. However, this was not the case at the Cable TV Corporation. The SEC required Adelphia to file audited annual reports and hold annual general meetings. The company contracted Delloite as the company’s external auditors. Both the board and the auditing committee had family representation. The auditing committee had four members and it was chaired by Michael Rigas, the then CFO of the firm. The composition of these two crucial bodies is the first red flag for what followed (Markon, & Frank, 2002).
In March 2002, it was discovered that an extensive financial fraud had been perpetuated by the Rigas family. Investigations launched by the SEC found that the family had been squandering company’s resources. The SEC also found out that the auditing committee had instructed that billions of dollars in liabilities be excluded from the final financial statements presented to stockholders (Markon, & Frank, 2002). Another revelation was that the Rigas siphoned money from the company’s cash management system to finance their lavish lifestyle and even used company’s monies to purchase their private stocks in other companies.
Key Ethical Problem
Two key ethical problems presented by the Adelphia case include the request by the Rigas family for the exclusion of the big debt-finance from being listed among the company’s liabilities and the Riga’s family withdrawal of company funds to finance their lavish lifestyle. The first ethical problem that involved the omission of recording multi-billion debt-finance was instructed by the Riga’s family. This problem emerged because the Rigas family had borrowed heavily from the company and other financiers. The family had falsified the financial statements in a manner that it misled the financiers that the company’s financial position was stable. The accumulation of this debts stems from the fact that the family relied heavily on debt financing to finance its rapid expansion in the market. Additionally, the Rigas also used the falsified financial statement to lure stockholders to buy stocks in subsidiaries while in fact the Rigas used the parent company’s funds to buy their stocks. This decision was both egoistic and selfish as it sought to maximize the wealth of the Rigas without caring much about the other stockholders.
The second ethical problem is about the Rigas withdrawal of funds from the company’s cash management system to finance its lavish expenditure. At one point, when asked about the extravagant expenditure on the construction of the golf course, John Rigas argued that it was meant to benefit the locals. On its face value, this assertion could be taken to support utilitarianism; a case where a decision is made to benefit many people. However, paralleling the number of people that were to benefit from the golf construction versus the number of Adelphia’s stockholders, the former looks like an ant in front of a giant. This is yet another perfect ensample of selfishness and egoism.
Deontology is an ensample of the theories of ethics and it asserts that moral actions are independent of the consequences that follow these actions. This theory supports the idea that individuals have only one possible action and this it calls, the fair thing to do. Deontologists investigate motives behind actions. An action that is wrongly motivated is deemed immoral even if it maximizes good. This theory upholds the virtues of trust and honesty. Persons are expected to uphold these two virtues in truth and avoid lying and dishonesty at all costs.
Deontology ethics is further divided into two branches i.e. act and rule deontology. Act deontology theorizes that every act is an ethical occasion where an individual can draw from his intuition and determine the fair thing to do in that situation. This branch argues that there is no need for asset of rules; once conscience is sufficient to give direction. On the other hand, the rule deontology asserts that there exist universal rules that set the standard of right and wrong. Rule deontologists believe in the tenet of making the rules universal, and often refer to these rules in solving moral problems. Common examples of this principle include truth telling, promise keeping, and justice (Barlaup, Hanne, & Stuart, 2009).
The rules of duty designed by Immanuel Kant require individuals to act in a manner that they expect others to act towards them. For instance, if one expects another to tell him the truth at all times, and then he should be truthful at all times. According to Kant, the ability to universalize an action is the surest test for its morality. Accordingly, if a decision is ethical but the motivation is unethical, then the whole action is unethical.
Applying the deontological framework of business ethics
Looking at the first ethical problem that related to the company omitting to report on the huge liability then we can apply deontological framework here. This omission of material facts from the books of account was not the fair thing to do. This assertion is informed by the fact that both the stockholders and financiers were misled into buying more stocks of a sinking ship. Deontology ethics points this as immoral because this act betrayed the tenets of truth and honesty upon which the whole theory is coined. Rules concerning the preparation of published financial statements are clear (Barlaup, Hanne, & Stuart, 2009). Any matter that is material needs to be incorporated in the drawing up of the financial statements. Additionally, inflation of financial accounts also served to falsify material fact, this was in contradiction to the provisions of deontological ethics that requires openness, and truth at all times.
The second problem concerned the withdrawal of company funds to finance the lavish lifestyle of the Rigas. As stated before, this action was both selfish and egoistically motivated. Application of the deontological framework requires that the family appreciate the fact that the assets of a public company no longer belongs to the family but to the company. The use of the company jet for private safaris, withdrawal of company finds from the cash management system for personal use, the use of company’s money to build a golf-course on a private land, all fail the test of deontological ethics. These actions together with the motive behind them are not only immoral but also selfish.
Applying Kant’s Categorical Imperative
Application of Kant’s categorical imperative framework to the problem of omission of material details from the financial records places the perpetrators of this fraud on the receiving end. Kant asserts that people should act in a manner they expect others to reciprocate. Having said that, then we can say that the family should expect managers of other companies where they have significant shareholding to act as fraudulently as they did. However, this is a wrong thing and universalizing a wrong is not possible. Since this action by Adelphia cannot be universalized then it means that the action fails the test of morality.
Applying Kant’s framework to the second ethical problem reveals the immoral nature of the action taken by the perpetrators of the fraud (Robert, 2004). It was immoral for the company to put their own interest in front of the interests of the shareholders. Additionally, it was also wrong and immoral to use company money to construct a golf course on Rigas’ property. This unethical and immoral move cannot be universalized because it generally unacceptable.
Barlaup, K., Hanne, I. D., & Stuart, I. (2009). Restoring trust in auditing: Ethical discernment and the Adelphia scandal. Managerial Auditing Journal, 24(2), 183-203. Retrieved on November 19, 2012 from ProQuest.
Mizzoni, J. (2010). Ethics: The basics. Chichester, West Sussex, U.K: Wiley-Blackwell.
Markon, J., & Frank, R. (2002, July 25). Adelphia officials are arrested, charged with ‘massive’ fraud – three in the Rigas family, two other executives held, accused of mass looting. The Wall Street Journal. Retrieved November 19, 2012 from ProQuest.
Robert, J. J. (2004, February 23). Kant’s Moral Philosophy. Stanford University. Retrieved November 11, 2013, from http://plato.stanford.edu/entries/kant-moral/
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