Corporate Governance in Adelphia Communications Corp-US - Case Study Example

?Running head: CORPORATE GOVERNANCE IN ADELPHIA COMMUNICATIONS CORP., US Insert Insert Grade Insert 27. October Corporate Governance in Adelphia Communications Corp- US Q1. What checks and balances exist within the corporate governance environment? (In the home country of the company). Adelphia Communications Corporation is one of the leading cable service providers, serving serves 37 American states and Puerto Rico; it is based in the United States Pennsylvania. Generally, good corporate governance requires a variety of rules and regulatory checks and mechanisms to be effective (Lessing 1). In the United States, checks and balances prevent any branch from accumulating too much power, hence encouraging cooperation. According to Kroszner (Para. 9), good corporate governance requires strong executives with an independent mind. Moreover, the Sarbanes –Oxley Act of 2002 applies to all organizations and it entails the requirements for the governance of organizations. The Act requires that management of an organization should certify a company’s financial reports and internal controls too. Despite the United States corporate governance being heavily criticized for the failure of some of major companies like Tyco and WorldCom, the country has improved on its Sarbanes –Oxley Act of 2002. The Sarbanes–Oxley Act promotes accuracy and accessibility of information, whereby investors are required to reveal the company’s transaction. The Act also involves penalties for those violating regulations; for instance, a maximum of 20 years in prison for fraud rather than a five-year sentence. Corporate governance entails the controlling and directing of companies in a direction of fairness, accountability, and transparency. Below are checks and balances within the corporate governance of the United States. Corporate accuracy & accessibility After the downfall of some of the leading companies like Enron, Tyco, and WorldCom among others, United States faced many critics regarding its corporate governance system (Holmstorm & Kaplan 1). Kroszner (Para. 9) insists, “Good corporate governance requires a very strong board of directors and auditors with independent minds and who ask tough questions.” The Sarbanes –Oxley Act fosters the principle of accuracy and accessibility whereby, it requires the revealing of company’s stock after the second day of transaction by its directors and principal investors. This fast revelation of the company’s stock makes it easier for the outsiders interested in the company. Failure to abide by the laws of this Act; a person is liable to 20 years of imprisonment. This act is aimed at creating quality standards for corporate governance, which managers and auditors must abide by. Management accountability The Sarbanes –Oxley Act fosters management accountability, hence preventing issues of fraud and the blame game. A corporate fraud task force was established in 2002 with an aim of curbing fraud in organizations. Accordingly, the managing directors and officers must certify the accuracy of their company’s financial reports. The Act requires a total of $1million for any officers who knowingly engage in false certification of financial reports. Auditor independence Auditors are limited to false and careless financial reports. However, this Act makes it difficult for managers to select and compensate an external auditor. The choice of an auditor is now made by the committee of independent directors who are not employees of the organization, hence being not related to the company. A new audit partner is required to be assigned to each client account. In addition, the government has formed the Public Company Accounting Oversight Board, with an aim of monitoring and enforcing the supply of audit services. Moreover, accounting firms are required to register with the oversight board, submit their periodic performances, and abide to the rules and regulations of the board (Kroszner (Para. 20). The Sarbanes –Oxley Act ensures that rules are followed to the latter by the organizations, and holds the directors of companies responsible for the accuracy of the company’s financial statements, hence curbing the blame game of “I was not aware.” The act requires that the financial reports be inclusive of an internal control report that not only shows the accuracy of the financial data, but also the company’s confidence in the reports. This act was formed after frequent financial scandals faced the leading companies, causing their downfall, with the quality standards incorporated in the act, internal checks and balances being strengthened. The act affects both the public companies and internal companies, which have registered equity or debt securities with the Social Exchange Commission. Q2; when working properly, what would these checks and balances have done? According to Solomon (46), the system of checks and balances involved in corporate governance needs to be effective so that they can function well. Though corporate governance mechanisms cannot hinder unethical activities in the top management, they can detect these violations before the situation gets out of hand. Checks and balances promote the standards of business in a country, as they hinder cases of fraud and violations to the business, thus protect shareholders. When checks and balances are implemented and followed successfully, the organization is able to create a strong bond with its shareholders, as they feel protected. With a balance of power among managers, shareholders and the board, good governance is developed, as fairness and transparency are achieved hence discouraging fraud cases. Long-term strategic objectives of a company are achieved and management is careful to make any bladders, as they do not want to compromise their company. Checks and balances ensure that, not only is the interest of the board of directors fulfilled, but also multiple goals of the company. The Sarbanes –Oxley Act fosters the principle of accuracy and accessibility whereby, it requires the revealing of company’s stocks. In this case, investors are able to predict the future performance of the company. Moreover, the stability of a company’s stock prices promotes good corporate governance, as investors are usually attracted by the corporate governance of a company. Checks and balances ensure that the stakeholders are involved in the productivity of a company, such as decision-making. When the system of checks and balances is effective, self-discipline, regulatory discipline, and market discipline are observed. Failure to this, crisis arises due to high risk and irresponsibility that leads to fraud. However, with the right corporate governance in place, stakeholders will be consulted before any risk is taken, as corporate governance will be transacted with transparency. The Sarbanes –Oxley Act demands that firms should have audit committees compromising of independent directors, as well as financial officers who should certify that the firm’s financial statements are accurate, thus hindering the possibility of fraud. The act requires an oversight board to oversee, regulate, and inspect accounting firms in their auditing roles. Therefore, when the checks and balances are working effectively, cases of fraud and scandals in Adelphia Communications Corp, for instance the unaccounted billion dollars that generated from secret loans. Deloitte failed to inform the investors that the Riga’s had used credit to buy the company stocks; indeed, the Rigas family used company funds to purchase personal assets, which led to the company downfall. However, with the Sarbanes –Oxley Act in place, such cases should not occur. Q3; What went wrong within the corporate governance environment in Adelphia Communications Corp? What were the failures? Adelphia Communications Corp was the fifth largest company dealing with cable in the United States until 2002, when it filed for bankruptcy; majority of its assets were at the time Warner Cable Company and Comcast. Adelphia communications was founded by John Rigas in 1952; however, it was among the companies that encountered financial trouble as a result of poor corporate governance and questionable accounting practices. The managers benefited at the expense of shareholders, and due to the poor corporate governance, the company resulted to bankruptcy. The company was doing well financially in the past and brought change to the United States population, and also benefited from the cable television and cable internet among others (Adelphia communications Para. 4). The business remained a family business and the family held five of the board seats, which included nine members in total. The organizational structure was hierarchical and decision-making was centralized, headed by the Rigas family. Despite the company being started on debt money, it accumulated many loans from banks, which had totaled up to 12.6billion by 2001. Investigations that were conducted proved that the company’s financial records were a total nightmare; the number of subscribers and earnings were overstated, internal controls were rare in the company, the Rigas’ family revenues had been dumped in one central account and bills were usually paid from the same account (Adelphia communications Para. 18). The Rigas family doctored the financial records, hence creating sham records; apartments were purchased in New York and vocational homes were purchased and African safaris organized. In addition, three corporate jets had been bought, all under the expense of the company’s funds. Therefore, there was no a separation between the company’s funds and those of the Rigas family. Therefore, the company was in deep financial trouble. Since the board consisted of majority of the Rigas family, the minority members would not have managed to control the situation. Indeed, it was only after they threatened the Rigas’ that they would take the matter to the press, that the CEO John Rigas stepped down on May 24th 2002, with a package of 1.4 million annually, followed by other family members thereafter. Since the Rigas’ had used most of the company’s money for personal gain, the company had little money left and bankruptcy was waiting due to the many debts it accrued. After the PriceWaterhouseCoopers audited the firm, it later filed for bankruptcy on June 24 2002, and shortly after, shareholders insisted on justice, leading to arrest of Rigas’. It is evident that poor corporate governance led to the failure of the once outstanding firm; the problems of the company were allowed to develop with little being done to prevent them, and the result of bankruptcy meant evidence in fraud. Self-dealing management and lack of transparency in financial statements contributed to the downfall of the company in 2002. Indeed, poor corporate controls via self-management were one of the failures, which cost the minority shareholders and stakeholders, (Adelphia communications Para. 34). Failures The company went against the checks and balances involved in corporate governance, which entail accuracy and accessibility, and management accountability, whereby the managing directors and officers must certify the accuracy of their company’s financial reports. The Act requires financial reports to be inclusive of an internal control report, which was not evident in Adelphia. A committee of independent directors who are not employees of the organization, hence being not related to the company should be involved in the choice of auditors. This avoids overstating financial statements by doctoring them, as it was the case with Adelphia. The company used the company’s money for their personal use and never accounted for it; some of the debts were not accounted for as they were secretly borrowed. Recommendation for Change An Independent Committee The committee responsible for selecting an auditor should be an independent board, which has no relations with the company and definitely not employees of the company. The committee must have independent minds and ask tough questions; this will guarantee good results of a quality auditor. Accessibility & Accuracy The disclosure of the company’s stock should not be a secret as it assists the investors to predict a company’s state, hence make an independent decision on whether to invest in the company or not. Therefore, auditors should disclose such important information to the public and ensure that the numbers are accurate. Accountability To avoid the blaming game, like in the Adelphia’s case, accountability should be enhanced from the directors to the managers, such that, the managing directors and officers must certify the accuracy of their company’s financial reports. This will ensure that the management delivers the right results in accordance with the law. Good corporate governance: Good corporate governance upholds the law and avoids any practices that would cost the company’s downfall and disadvantage its shareholders and stakeholders, hence improving the company’s performance (Kleinschmidt 9). Unlike the Adelphia Communications Corp’s case, whereby accounts were doctored and company money used for personal benefits, good corporate governance is directed towards transparency, fairness, and justice. All expenses in a company are supposed to be accounted for, and the managers should not tamper with the company’s money; they should use their salaries for personal interest, rather than compromising the company’s funds. An independent board of directors Despite Adelphia Communications Corp being a family business, the choice of dominating the board of directors with family members as the majority was a wrong move. This is evident in terms of decision making, where the majority wins (The Rigas, who outnumbered the other board members). Hence, incase of a wrong decision, it was hard to outnumber the majority. A board of directors should compromise of balanced intelligent individuals who understand the company well, hence interested in the company’s stakeholders’ and clients’ benefits, rather than personal benefit. Conclusion: Adelphia is among the many companies that have collapsed as a result of poor corporate governance. Corporate governance is an important factor in any company, as it ensures the company operates in the right direction, hence fostering transparency and fairness. Overlooking personal interest and concentrating of the company’s interest eliminates personal gain through doctoring of account statements and soliciting for the company’s funds. The Sarbanes –Oxley Act standards fosters healthy business within the company, and protects the shareholders by implementing laws that eliminate issues contributing to fraud. Works Cited Adelphia communications. N.d. 29 October 2011. http://www.financeprofessor.com/Adelphia/adelphia_communications%202.19.04.htm Holmstrom, Bengt & Kaplan, Steven. The State of U.S. Corporate Governance: What’s Right and what’s wrong? MIT University of Chicago, March 19, 2003. 29 October 2011. http://research.chicagobooth.edu/economy/research/articles/185.pdf Kleinschmidt, Maik. Venture capital, corporate governance, and firm value. NY: DUV Publisher, 2007. Kroszner, Randall. Checks and Balances; the Economics of Corporate Governance Reform. 2004. 29 October 2011. http://www.chicagobooth.edu/capideas/oct04/checksbalances.html Lessing, John. The checks and balances of good corporate Governance. 2009. 29 October 2011. http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1015&context=cgej&sei-redir=1&referer=http%3A%2F%2Fwww.google.co.uk%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3DJohn%252BLessing.%252B%252522The%252BChecks%252Band%252BBalances%252Bof%252BGood%252BCorporate%252B%26source%3Dweb%26cd%3D3%26ved%3D0CC0QFjAC%26url%3Dhttp%253A%252F%252Fepublications.bond.edu.au%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1015%2526context%253Dcgej%26ei%3D-AapTrfFHsrJhAfhkOmVDg%26usg%3DAFQjCNEZfFCbV2s99KHPQvBAAECkuJ9Uog#search=%22John%2BLessing.%2B%2522The%2BChecks%2Band%2BBalances%2Bof%2BGood%2BCorporate%2B%22 Solomon, Jill. Corporate governance and accountability. NJ: John Wiley and Sons Publishers, 2007. Read More