Financial Statements and Ethics

¶ … behave ethically are more apt to earn the trust of their customers, employees, and stockholders. A system of ethics serves as the backbone of an organization. Without such a backbone, an organization cannot be firm enough to provide its various parts (employees, stockholders, customers) with what they need. An organizational culture supported by a system of ethics enables the company to grow, develop and attain suitable positive goals that benefit all stakeholders.

When that system is evident to customers, employees and stockholders, all three are more willing to climb on board to be part of the journey. Ethical behavior on the part of organizations can take various forms -- from corporate social responsibility programs to simple workplace environment cultures. Yet some companies fail to truly understand these forms and how they work. This paper will look at one organization -- Adelphia -- and examine how it failed to embrace an adequate ethical framework and what happened as a result.

Background As a publicly-traded corporation, Adelphia, Inc. was one of the largest providers of cable services in the United States. After the company went public, it was learned that the company had materially misrepresented its audited financial statements by failing to disclose billions of dollars in debt. To make matters worse, the company's independent auditors were found to have been complicit in the fraudulent activity, helping the company to conceal the lavish personal expenditures of the Rigas family.

"Cooking the Books": The First Ethical Issue The first major ethical problem raised by the Adelphia case relates to the manipulation of Adelphia's financial statements. John Rigas and his sons routinely "cooked the books," purposefully inflating earnings in an effort to meet shareholders' earnings expectations, and to demonstrate the company's earnings power to prospective investors. Fearful of a plunge in stock price or defaulting on its creditor agreements, Adelphia executives would hold secret meetings at the end of each quarter to discuss the company's financial results (Grant, 2004).

When Adelphia's quarterly numbers were out of line with creditors' covenants, employees were tasked with making arbitrary adjustments to the accounting records, inflating the company's revenues and reducing its expenses, ultimately bringing the numbers back into alignment with creditors' expectations (Meier, 2004). Unfortunately, Adelphia's fraudulent accounting practices went undetected by the company's auditors, who failed to ensure that the company's financial statements accurately reflected the company's true financial position (Barlaup, Hanne & Stuart, 2009).

For instance, the funds owed the company by the Rigas family went undisclosed in the statements, because the management at Adelphia deemed such disclosure as being "unnecessary" (Barlaup et al., 2009). Given that Adelphia was a publicly traded company, the purposeful non-disclosure caused potential investors to rely on financial records that were grossly misleading. The inevitable result was the investors continued to inject money into a company that had all the appearances of profitability and sustained growth, but that was, in reality, rapidly becoming insolvent.

Moreover, lending institutions also relied on the "independently-audited" financial statements, and they were more than eager to loan the company money, given Adelphia's presumed state of financial "profitability." "Piggy Bank": The Second Ethical The second ethical problem in this case relates to the Rigas family's use of publicly-held corporate funds as a personal "piggy bank." The Rigases used the company jet for personal reasons (without approval of the Board of Directors), on one occasion flying to Africa for a safari (Markon & Frank, 2002).

On another, one of John Rigas' sons used a corporate jet to pick up an actress friend of his (Grant, Young, & Nuzum, 2004). The former CFO claimed that Adelphia's funds were used by one of Rigas' sons to buy a condominium, and to build a $13M golf course (Grant et al., 2004). In another incident, the corporate jet was used to ship a Christmas tree from Pennsylvania to New York.

The tree was not the right size, and a second tree was jetted to the daughter -- the cost of the two trips to Adelphia shareholders was $10,000 (Stern, 2004). Duty Ethics In duty ethics, it is the action or behavior itself that determines whether that action or behavior is right or wrong -- and not the outcome or consequences of that action (Alexander & Moore, 2012). For example, most would agree that people have a duty not to steal.

In duty ethics, is the act of stealing that is deemed to be unethical -- and not the outcome or consequences that may arise because someone has stolen something. Beyond the nature of the act itself, duty ethics is also focused on the rights of other individuals -- that is, the rights of individuals take precedence no matter how good the outcome may be (Alexander & Moore, 2012).

For example, while an individual has a duty not to steal from a property owner, the property owner has a reciprocal -- and inherent -- right not to be stolen from. The renowned philosopher Immanuel Kant is well-known for his Categorical Imperative, which generally states that a given act is ethical only if we can will that act to be universally-acceptable (Johnson, 2008).

In other words, if we cannot say that we would want everyone to act or behave in a certain way -- and at all times -- then that act or behavior is not ethical. Stealing is wrong because none of us would want to live in a world in which stealing was universally acceptable, simply because such a world would be filled with chaos and unpredictability (nor could anyone safely own property).

For this reason, duty ethics would consider stealing to be wrong -- because stealing is universally held to be wrong. Applying Duty Ethics to the Case of Adelphia If we are to apply duty ethics to the Adelphia case, we will find that the Rigas family acted unethically. First, Rigas had a duty to safeguard the money invested by the company's shareholders. Conversely, the shareholders at Adelphia had a right to expect that Rigas would use their money only for purposes of running the business.

Kant's Categorical Imperative would say Rigas' use of company money for personal use was unethical, simply because we would not wish to live in a world in which company executives could freely use stockholders' money for personal use. Of course, had Rigas truthfully disclosed the magnitude of the company's debt, potential investors would have been apt to invest their funds elsewhere.

As is true of Rigas' use of company funds for his personal use, Rigas' lack of disclosure was unethical because he chose to contravene his duty to disclose all of the company's debt, and to hide the true value of the company from possible investors. Immanuel Kant would say that Rigas acted unethically because we would not want to live in a world in which the falsification of the accounting records of publicly-held companies was universally-held to be an acceptable practice.

Conclusion In summary, a system of ethics is essential for organizational success. Adelphia is.