THE NATION’S NEWSPAPER
Collegiate
Case
Study
By David Lieberman and Greg Farrell
Part II: The results
WorldCom scandal brings
subpoenas, condmnation
By Andrew Backover and Thor Vladmanis
Andersen’s partners chart
firm’s future today
By Greg Farrell
Client-starved Arthur Andersen
cuts 7,000 jobs
By Greg Farrell
Dominoes hit WorldCom
partners, clients
By Michelle Kessler
“Creative accounting” is not a new technique, but it can certainly be a costly
one. Businesses feel the pressure to appear profitable in order to attract
investors and resources, but deceptive or fraudulent accounting practices often
lead to drastic consequences. Are these so-called creative practices always
illegal or can they ever be justified? This case study will present examples of
companies who have used inappropriate accounting practices, the results of
their deceptions and the government's plan to avoid future incidents.
Adelphia plans
to file Chapter 11
Cable firm expected to seek
bankruptcy protection today
Case Study Expert:
John D. Martin, Ph.D.
Professor of Finance, Baylor University
USA TODAY Snapshots®
Politicians role in monitoring business
Opinion leaders1 say government should be more
involved in oversight and regulation of private
enterprise2:
52%
45%
Agree
www.usatodaycollege.com
Accounting fraud
Adelphia founder, 2 sons,
2 others arrested in fraud
Disagree
Source: Edelman Public Relations Worldwide/
StrategyOne Research survey of 400 respondents.
BS2003-01b
1 – College
educated 35- to
64-year-olds
with household
incomes of
more than
$100,000
2 – Does not
add up to 100%
due to rounding
By Darryl
Haralson
Marcy
E. Mullins,
USATODAY
TODAY
By Darryl
Haralson
andand
Marcy
E. Mullins,
USA
NEW YORK -- The waiting should be
over today. Adelphia Communications
plans to file for bankruptcy protection,
nearly three months after the onceproud No. 6 cable operator first
disclosed dealings with the family of
founder John Rigas that turned it into a
symbol of corporate scandal.
The company is expected to
announce that it has raised as much as
$1.5 billion from banks led by J.P.
Morgan Chase and Citigroup to keep
operating while a bankruptcy judge
decides how creditors will be paid.
A Chapter 11 filing — the biggest in
cable history — could help efforts to
find a buyer for some, or all, of
Adelphia's systems, which serve 5.7
million subscribers. The court can
protect an acquirer from unexpected
liabilities, including those stemming
from several shareholder lawsuits and
investigations into Adelphia's finances
by two grand juries and the Securities
and Exchange Commission.
The company could pay off its
estimated $19 billion in debt if it can
sell systems for $3,500 per subscriber,
roughly the industr y norm. But
stockholders could lose their entire
investments. Adelphia shares closed
Friday at 15 cents in over-the-counter
trading.
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AS SEEN IN USA TODAY MONEY SECTION, MONDAY, JUNE 24, 2002
And a sale may devastate
Coudersport, Pa., where Adelphia is
headquartered. It's by far the largest
employer in the rural, mountain town
of 3,000.
Meanwhile, Adelphia will tr y to
reassure its subscribers. "Adelphia is
committed to reversing its admittedly
difficult present financial situation," it
wrote last week to 3,500 franchise
officials. "Most importantly, there
should be no change in service to
Adelphia customers as a result of these
developments."
Adelphia's downfall began on March
27, when it disclosed that a Rigas
family partnership had borrowed $2.3
billion using company assets as
collateral. The amount has since been
raised to $3.1 billion. That stunned
analysts, who believed that the
operator was already too deeply in
debt.
put several cable systems on the block.
The company defaulted on bank loans
and failed to make interest payments
on bonds. And Rigas and sons Timothy,
Michael and James were forced to
relinquish their jobs and board seats.
Barraged with questions, Adelphia
put off release of its 2001 annual
report. More questions were raised
when it was confirmed that the SEC
was investigating.
Then new interim CEO Erland
Kailbourne stunned company
watchers by disclosing a series of cases
where the Rigas family allegedly used
Adelphia for private gain. Among other
things, the company paid for their
apartments in New York, built a golf
course on Rigas-owned land, helped
the purchase of the Buffalo Sabres
hockey team, created a Rigas-run
investment firm and subsidized a
documentary film.
As the stock plummeted, Nasdaq
weighed delisting Adelphia shares.
That took effect on June 3.
After acknowledging that it would
have to restate its earnings, Adelphia
Cover story
Adelphia founder, 2 sons,
2 others arrested in fraud
Investigators say company was 'personal piggy bank'
By David Lieberman and Greg Farrell
USA TODAY
frauds ever perpetrated on investors and creditors." Rigas
attorneys were unavailable for comment.
NEW YORK -- For 50 years, John Rigas lived the American
Dream.
With TV cameras capturing the humiliating moment, the
founder of Adelphia Communications, the No. 6 U.S. cable
company, was led away in handcuffs here. He became the
first CEO arrested in the latest wave of corporate
accounting scandals and the most vivid symbol of whitecollar crime since Michael Milken and Ivan Boesky in the
1980s.
Half a century ago, the son of Greek immigrants left a job
making TV picture tubes at Sylvania. The World War II
veteran bought a small movie house and a newfangled
business — a cable TV company — in the remote town of
Coudersport, Pa., and was on his way to making a fortune.
But his oversized ambitions led him this week into an
American Nightmare.
Wednesday, Manhattan U.S. Attorney James Comey
accused 77-year-old Rigas and two sons — Timothy and
Michael — with "one of the largest and most egregious
Two other former Adelphia executives, James Brown and
Michael Mulcahey, were picked up in Coudersport.
Later in the day, Adelphia itself — which filed for
bankruptcy-court protection last month — charged Rigas
and his family with violating the Racketeer Influenced and
Corrupt Organizations (RICO) Act, in a filing in Federal
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Bankruptcy Court in New York. The Rigases could be forced
to pay three times any damages the court finds. The lawsuit
alleges about $1 billion in damages.
would "only have the effect of further penalizing the
company's stakeholders who were the victims of the Rigas'
improper conduct."
Behind their "small-town facade," the Adelphia lawsuit
says, the Rigases "used their domination and control of
Adelphia, and their isolation from the scrutiny of the outside
world, to engage in one of the largest schemes of selfdealing and financial wrongdoing in American corporate
history."
The Adelphia cases are low-hanging fruit for prosecutors
eager to show that they're getting tough on white-collar
criminals.
The Justice Department and the U.S. Postal Inspection
Service charged the five executives with securities, wire
and bank fraud, saying they "looted Adelphia on a massive
scale" and used it as a "personal piggy bank." Rigas private
funds sloshed with Adelphia's in the same cashmanagement system.
A U.S. judge set bail for the Rigases at $10 million apiece,
secured by cash and property.
Allegations against the Rigases range from big schemes to
hide financial problems at the cable company to relatively
small-scale thievery.
For example, Timothy was accused of using a company jet
for an African safari vacation in 2000. Adelphia's lawsuit
adds that John's daughter, Ellen, used company planes to
bring guests to her wedding to Peter Venetis, who became
an Adelphia board member.
The couple's cozy position enabled them to save $150,000
since 1998: They lived rent-free in two Adelphia-owned
apartments on Manhattan's swank Upper East Side, the
lawsuit says.
In less than four years, the Rigases "stole hundreds of
millions of dollars, and through their fraud (and) caused
losses to investors of more than $60 billion," Deputy
Attorney General Larry Thompson says.
The defendants could face jail time in the criminal case. By
filing a complaint instead of a full-fledged indictment, the
grand juries weighing evidence in the case can remain
empaneled to approve charges against others. They have 10
days to indict those arrested, and 20 days to charge others.
Also Wednesday, the Securities and Exchange Commission
filed a civil lawsuit in U.S. District Court that's similar to the
criminal complaint, and includes a third Rigas son, James.
The SEC would bar the defendants from serving any publicly
owned company. It also wants them and Adelphia to pay
restitution and fines.
Adelphia said in a statement that the claim against it
"This is an old fashioned hand-in-the-till case that's easier
to prosecute than an esoteric fraud like Enron," says Jack
Coffee, who teaches securities law at Columbia University.
"To prosecute Enron, you're going to have to teach the jury
an intermediate college course in accounting."
Jacob Frenkel of Smith Gambrell and Russell agrees. "This
could be sexiest of all the cases," he says. "Here, you're
talking about corporate looting. Every guilty disposition
arising out of this indictment should become a show-andtell in all business schools as the antithesis of public
company management and stewardship."
Talking tough, getting tough
The arrests came as House and Senate negotiators agreed
on tough measures, including jail time, for executives
convicted of fraud.
And Wall Street was impressed after weeks of growing
fearfulness about a possible tsunami of corporate scandals.
The Dow Jones industrial average soared 489 points
Wednesday. That's the second biggest one-day point gain
ever.
That contrasts with the 179-point drop on July 9, when
President Bush called for a new era of corporate
responsibility.
The arrests aren't "about Democrats and Republicans,"
says Lynn Turner, former chief accountant of the SEC under
President Clinton. "This is about investors, and they like
what they're seeing now."
Even people who aren't obsessed with stocks seem to like
the idea of big shots getting a comeuppance.
"We are angry, and we have every right to be angry," says
futurist and consumer expert Marian Salzman of Euro RSCG
Worldwide. "There's a feeling that we need to kick out the
evil-doers in the industry."
But some might recoil at the image of a dignified old man
being led before the cameras in handcuffs.
"They're actually going to look sympathetic," says Robin
Cohn, author of The PR Crisis Bible. "Why would you
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handcuff an old man? He's not a murderer and a rapist.
That's not to say they aren't crooks.But I think the public
would rather see somebody they know in handcuffs — like
(former Enron CEO) Ken Lay."
And the incident could make the government look
somewhat silly, she says. "I can't imagine Saturday Night
Live not doing anything with this."
Corporate crime is in the spotlight these days. Last
month, federal prosecutors arrested former ImClone CEO
Sam Waksal on charges of illegal trading on inside
information and obstruction of justice. Their investigation
has expanded to include friends and family of Waksal, who
also might have illegally traded on inside information about
ImClone last December.
Investigators are trying to determine whether any inside
information was passed to Waksal's friend Martha Stewart,
who sold her ImClone stock just before a Food and Drug
Administration announcement, denying an application to
market a cancer-fighting drug, drove the stock price down.
In coming months, the Justice Department is expected to
charge top executives of Enron and WorldCom with fraud.
The department's Enron Task Force won one court battle
last month when a Houston jury found auditor Arthur
Andersen criminally guilty of obstruction of justice.
It appears, though, that officials wanted to start off with a
bang as they arrested the Rigases.
"What's unusual here is the level of detail included in the
criminal complaint, and the number of defendants arrested
simultaneously," says former prosecutor Robert Mintz, now
at McCarter & English. "Usually, the government builds a
case slowly, with eventual defections among defendants.
Here, it has leveled a wide range of allegations against
upper management. That suggests that the government
believes it has strong case and that they expect a rush to
the prosecutor's door by defendants who will vie to strike
deals."
The cases build on information that began to come out in
late March. Adelphia disclosed then that the Rigases had
used assets of the already debt-heavy company to secure
loans to private, family-run partnerships. That borrowing is
now put at $3.1 billion.
Independent directors forced the Rigases out of their
executive positions and board seats, installing former
banker Erland Kailbourne as interim CEO. When they
investigated the company's condition, they found and
disclosed case after case in which the Rigases made no
distinction between their personal funds and businesses
and Adelphia's.
Bad news gets worse
But Adelphia was already in a tailspin. Investors lost
confidence. Auditors refused to certify the company's
financial reports. And lenders cut it off, leading the
company to miss interest and dividend payments.
Among the charges leading to the Rigases' arrest:
u That the family began using Adelphia as collateral for
private loans in 1996, even though the company "was one
of the largest junk bond issuers in the United States."
Investors weren't told.
u That the Rigases secretly inflated Adelphia's cable TV
subscription numbers to make investors think it was still
growing at a healthy pace.
In 2000 they began to count subscribers from systems in
Brazil and Venezuela, where Adelphia owns a minority
stake. In 2001, Adelphia began adding customers who just
ordered high-speed Internet services from the Rigases'
non-Adelphia systems.
And earlier this year, they folded in people who ordered
home security services from Adelphia.
u That they used accounting legerdemain to disguise
Adelphia's actual expenses for digital decoder boxes. In
2001 the company claimed that it sold 525,000 boxes for
$101 million to an unaudited Rigas-owned company that
has no cable systems.
u That, starting in 2000, Adelphia spent $13 million to
build a golf club on land mostly owned by John Rigas.
u That in 1999, they told analysts that Adelphia could
provide two-way communications to 50% of its customers.
The real number was 35%.
u And that the Rigases took more than $252 million from
Adelphia to pay for margin calls on their purchases as the
company's stock price fell.
Contributing: Michael McCarthy
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AS SEEN IN USA TODAY NEWS SECTION, FRIDAY, JUNE 28, 2002
WorldCom scandal brings
subpoenas, condemnation
Accounting rumors rattle Wall Street
By Andrew Backover and Thor Valdmanis
USA TODAY
afternoon because of rumors of accounting irregularities.
GM said they were untrue.
The accounting scandal that enveloped WorldCom
reverberated through Wall Street and Washington on
Thursday.
Broadcast giant Clear Channel Communications denied it
is under an SEC investigation, yet its stock fell almost 13%.
u Congress subpoenaed top WorldCom executives.
u President Bush and Treasury Secretary Paul O'Neill
separately railed at corporate wrongdoers.
u Unfounded rumors of accounting problems hit stocks
of other companies.
WorldCom on Tuesday revealed what could be one of the
biggest accounting frauds ever. Company officials said $3.9
billion in expenses had been hidden in financial statements,
inflating profits in 2001 and the first quarter of 2002.
The Securities and Exchange Commission has since
charged WorldCom with fraud.
Bush, at an economic summit in Canada, said he is
concerned about the economic impact from "some
corporate leaders who have not upheld their
responsibility."
O'Neill, a former chief executive of Alcoa, said in an
interview on ABC's Good Morning America that the people
responsible should be prosecuted to the full extent of the
law.
WorldCom has raised fears and rumors about more
business accounting scandals.
The House Financial Services Committee set a July 8
hearing into the WorldCom case. Subpoenas went to:
u Current WorldCom CEO John Sidgmore.
u Former chief financial officer Scott Sullivan, who was
fired this week.
* Former WorldCom chief executive Bernie Ebbers, who
was ousted in April and who owes WorldCom $408 million
for personal loans.
u Salomon Smith Barney telecom analyst Jack Grubman.
Once one of WorldCom's most bullish supporters on Wall
Street, he has been criticized for possible conflicts of
interest. His firm collected millions of dollars in fees as a
WorldCom financial adviser.
WorldCom spokesman Brad Burns declined comment on
whether Sidgmore would invoke his Fifth Amendment right
not to testify. Ebbers and Sullivan couldn't be reached.
Salomon says Grubman "will fully cooperate."
And there could be more investigations. The House
Energy and Commerce Committee told WorldCom to turn
over financial records by July 11.
WorldCom, strained by $30 billion in debt, will cut 17,000
jobs, or 21% of its workers, starting today. Workers will get
severance pay, Burns says.
Trading was halted for General Motors stock Thursday
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AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, MARCH 28, 2002
Andersen's partners
chart firm's future today
By Greg Farrell
USA TODAY
NEW YORK -- Arthur Andersen's U.S.
partners will huddle in a nationwide
teleconference today to determine the
firm's immediate future.
At issue: who should lead the firm's
U.S. operations on an interim basis,
and what steps Andersen should take
to remain in business.
According to senior partners briefed
on the meeting's agenda, Andersen's
1,700 U.S. par tners will decide
whether to ask Paul Volcker to assume
control of Andersen's domestic
operations.
In February, Andersen CEO Joseph
Berardino asked the former Federal
Reserve chairman to head an oversight
board dedicated to fixing the firm. A
month later, a federal grand jur y
indicted Andersen on a charge of
obstruction of justice for its role in
shredding Enron documents last
October.
Friday, in a last-ditch effort to stanch
client depar tures and restore
confidence in Andersen, Volcker
offered to lead Andersen if its top
par tners asked him. On Tuesday,
Berardino resigned. Managing partner
C.E. Andrews will meet with Volcker
today to discuss his takeover plan.
J ustice Depar tment lawyers will
respond to Andersen's motion to halt
further grand jury testimony prior to a
May 6 trial. If Judge Melinda Harmon
sides with Andersen, it will make the
government's obstruction of justice
case against Andersen more difficult to
win.
While many obser vers think
Volcker's arrival could persuade the
J ustice Depar tment to drop the
indictment, some Andersen partners
are wary of being the subject of an
idealistic experiment in transforming
the accounting industry.
u Andersen's top global partners
will meet Tuesday in London to pick
an interim CEO.
The partners will also discuss, and
probably adopt, a "Renaissance"
program aimed at returning Andersen
to its roots as a highly regarded
auditing firm. This proposal,
supported by Andrews, has gained
support among older partners who
want to stay and rebuild the firm.
u Andersen's global operations
continue to fragment. Its Japanese
affiliate, Asahi & Co., announced plans
to merge this fall with rival KPMG.
Andersen has also discussed selling
affiliates to Deloitte Touche Tohmatsu.
Wednesday night, Deloitte spokesman
Matthew Batters suggested the firm
was only interested in hiring individual
Andersen partners and picking up
clients leaving the firm.
In other developments:
u At federal cour t in Houston,
Contributing: Thor Valdmanis
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AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, APRIL 9, 2002
Client-starved Arthur
Andersen cuts 7,000 jobs
Long expected, layoffs offer first tangible sign of firm's distress
By Greg Farrell
USA TODAY
office space to search for new jobs.
WorldCom has engaged in what could be one of the
bArthur Andersen fired one partner in January for his role
in shredding Enron documents. On Monday, the auditing
firm announced it will lay off 7,000 of its 26,000 U.S.
employees because of the consequences of that shredding.
The job cuts at Andersen have been expected for weeks,
ever since the Justice Department unsealed an indictment
against the firm for its role in destroying its paperwork just
as a Securities and Exchange Commission inquiry into
Enron was about to begin.
Since the indictment, unsealed on March 14, scores of
clients have deserted Andersen. As Andersen partners
leave the firm for opportunities at other Big Five rivals,
more clients are expected to migrate.
So far, Andersen has weathered the crisis without filing
for bankruptcy protection. But the layoffs, announced
Monday, are the first tangible sign of financial distress at the
firm.
Of the 7,000 employees being let go, the vast majority are
auditing staffers and managers, as well as administrative
personnel. A small number of Andersen's 1,700 U.S.
partners are also being let go.
According to managing partner Grover Wray, most
partners are still needed to serve Andersen's remaining
clients. Rather than hand out severance checks to laid-off
employees, Wray says Andersen is implementing a program
called "salary continuation."
nder this plan, laid-off workers will continue to be paid
for a certain number of weeks, depending on how long
they've been with the firm. During that period, these
employees will keep their benefits and be free to use their
"We are trying to treat our people with a level of dignity,"
Wray says.
In addition to client defections, Andersen also faces major
liabilities for the role it played in Enron's collapse into
bankruptcy last fall. Plaintiffs lawyer Bill Lerach filed an
expanded complaint Monday against Andersen and former
Enron managers in federal court in Houston.
But the expanded lawsuit, on behalf of a major Enron
shareholder — the University of California system — adds
nine Wall Street investment banks and two law firms to the
list of defendants.
Representatives from the banks — JP Morgan Chase,
Citigroup, CS First Boston, Canadian Imperial Bank of
Commerce, Bank of America, Merrill Lynch, Deutsche Bank,
Barclays and Lehman Bros. — either declined comment on
Monday or denied the complaint's allegations of complicity
in Enron's collapse.
Notably, Lerach's complaint leaves out two key players in
Enron's demise — Michael Kopper, who headed some of the
special purpose entities that kept Enron liabilities off the
company's balance sheet, and Ben Glisan, the former Enron
treasurer accused of facilitating some of Enron's dubious
accounting practices. Glisan is now believed to be
cooperating with the Justice Department probe of Enron's
activities.
Lerach would not comment on whether the pair supplied
his investigators with information. But Larry Finder, a
former U.S. Attorney now in private practice in Houston,
doubts either is helping Lerach. Finder says that if either of
them is providing information, it would be to the Justice
Department first, where they face criminal liability. And the
Justice Department wouldn't necessarily welcome a
decision by a witness to cooperate in civil litigation.
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AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, JULY 9, 2002
Dominoes hit WorldCom
partners, clients
Unpleasant ripple effect also spreads to
vendors, charities, sponsored events
By Michelle Kessler
USA TODAY
The WB television network, PGA Tour and Texas Parks
and Wildlife service aren't in telecom, but they've already
been hurt by the WorldCom scandal. That's because they
all did business with WorldCom, as did thousands of other
companies.
Now they're all trying to figure out where they stand
with the struggling giant -- and coming up with backup
plans.
"This is not going to be pleasant for a lot of companies,"
says Kerry Adler, CEO of WorldCom customer Webhelp.
Among those affected:
u V e n d o r s . WorldCom repor ted that its capital
expenditures dropped 42% to about $1.3 billion in the first
quarter from a year ago, yet it remained a big customer for
many telecom equipment makers. While it's unclear how
accurate WorldCom's numbers are because of the
accounting scandal, what is clear is that its spending has
slowed.
The hardest hit is Juniper Networks, says Banc of America
Securities analyst Christopher Crespi. WorldCom provided
about 10% of Juniper's annual revenue, including "less than
$7 million" this quarter, Juniper says. If WorldCom stops
buying, that could dampen Juniper's forecast for the year.
"It could easily subtract $50 million or $60 million off their
top line," says Soundview Technology analyst Ryan Molloy.
Customers Cisco Systems, Nortel Networks and Redback
Networks could also get stung, but WorldCom accounts for
just a small percentage of total sales, says U.S. Bancorp
Piper Jaffray analyst Edward Jackson.
All telecom equipment makers could be affected in
coming months, even if they didn't do business directly
with WorldCom, analysts say. WorldCom was known for
buying the latest, most high-tech equipment, forcing
competitors to do the same if they wanted to keep up. With
WorldCom out of the picture, spending could lag.
u Contractors. In 1999, when consulting firm EDS signed
an 11-year, $6.4 billion contract to provide technology
services to WorldCom, telecom was a growing industry.
EDS is stuck with the deal and a related pledge to buy $6
billion worth of telecom services during that period. Now,
EDS says it no longer wants to spend that much with
WorldCom. It's in talks to work out a deal.
RMH Teleservices has a five-year contract to provide
customer service for WorldCom's MCI division. That
accounted for 19.5% of RMH's revenue from October to
March. "While we cannot predict the future . . . we expect
to continue to provide these services for MCI," RMH leader
John Fellows said in a statement.
u Business partners. Last year, WorldCom pledged to buy
millions of dollars in advertising from AOL Time Warner
over several years. The exact terms were not disclosed.
Now, that deal could be off, meaning fewer ads for Time
magazine, cable's TBS and the WB television network.
WorldCom also provides service to the company's AOL
Internet division. AOL says it has backup providers in case
WorldCom service is disrupted.
Satellite cable provider DirecTV is holding meetings to
determine how to handle its 4-month-old partnership with
WorldCom. WorldCom was to provide the underlying
network for part of DirecTV's high-speed Internet access
service. Similar questions are being asked at Internet
Security Systems, a software company that agreed in May
to provide security services to WorldCom customers. The
value of the two deals was not disclosed.
* Sponsored events. Last week's Fourth of July fireworks
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celebration on the Mall in Washington was supposed to be
paid for by WorldCom, which has sponsored part of the
festivities for five years. But the company pulled out. The
National Parks Foundation scrambled to find new funding
from AT&T.
Also in Washington, the MCI Center arena might soon be
looking for a new sponsor and name. The WorldCom
Classic, an annual PGA Tour stop in Hilton Head, S.C., is in
the same situation.
u Charities. Each month, about 10,000 teachers receive
free training in math, science and the arts from the
MarcoPolo project, which is sponsored by WorldCom's
charity arm. Now, program administrators and partners —
including the National Geographic Society, American
Association for the Advancement of Science and The
Kennedy Center — are tr ying to make the proj ect
independent of the struggling company. Last week, they
pulled WorldCom's logos from the MarcoPolo Web site.
They're applying to make it a "public charity," says Caleb
Schutz, president of WorldCom Foundation. "There's a lot
to lose if the company . . . pulled the plug." For now,
WorldCom still funds MarcoPolo.
u Customers. The Texas Parks and Wildlife department
spent last week printing temporary fishing and hunting
licenses as a quick contingency plan. The department
relies on a WorldCom computer network to transmit
license information to 2,500 vendors. "We certainly have
to consider what might happen to our contract," says Suzy
Whittenton, a wildlife director.
Webhelp, which outsources customer service for
companies such as Microsoft, uses WorldCom to connect
its overseas technology specialists with help-seekers in
the USA. Because of a contract, Webhelp can't switch
providers but was forced to get a backup provider in case
WorldCom fails. That means twice the bills. "It's expensive,
and at the end of the day, our clients pay for that," says
CEO Adler.
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Page 9
Behind the Story: A Reporter’s Notebook
Greg Farrell
Money reporter
USA TODAY
The collapse of Enron and WorldCom, precipitated by revelations
that both companies had misrepresented how profitable they
were, threatens the health of the the nation’s stock markets. If
investors can’t believe earnings numbers issued by the biggest
companies in the USA, they won’t put their money into the market. And when investors take their money out of the market, as
they’ve been doing for more than two years, businesses suffer.
They can’t invest, they can’t grow as quickly and they can’t afford
to hire more people.
As the Enron and WorldCom examples demonstrate, there’s no
room in a public marketplace for “creative accounting.” Once a few cheaters are
revealed, the integrity of the entire marketplace is open to question.
Greg Farrell is a reporter in USA TODAY’s Money section. He writes about fraud and
white collar crime. In the past year, he has been reporting on Enron, Arthur
Andersen, Martha Stewart and the Securities and Exchange Commission.
Page 10
For discussion
ADELPHIA PLANS TO FILE CHAPTER 11; ADELPHIA FOUNDER, 2 SONS, 2 OTHERS ARRESTED IN FRAUD
(LIEBERMAN AND FARRELL)
1. Adelphia Corporation was the sixth largest cable company at the time of its collapse. The company was
accused of a number of fraudulent activities including the manipulation of its financial reports. Specifically,
the firm was accused of misreporting its cable subscription numbers in order to give the impression that the
firm was growing faster than it was. For example, they counted subscribers from systems in Brazil and
Venezuela where the company owns a minority stake in the company’s total subscribers. They also counted
customers who ordered high-speed Internet services from companies owned by the Rigas family and clients
that ordered home security services from Adelphia. Why would Adelphia’s management engage in what
appears to be blatant misrepresentation of their number of subscribers?
2. When CEO John Regas of Adelphia was led away in handcuffs on racketeering charges, some complained
that the justice department was making too public a display of its tough stance on white-collar crime. This
type of treatment is normally associated with murderers and rapists. How do you feel about the importance
of making a public spectacle of white-collar criminals?
3. The Adelphia lawsuit stated that the Rigases "used their domination and control of Adelphia, and their
isolation from the scrutiny of the outside world, to engage in one of the largest schemes of self-dealing and
financial wrong doing in American corporate history." Financial economists refer to this type of behavior as
an agency cost since corporate executives are the agents of the firm’s owners or principals. How can
stockholders protect themselves from the potential for self-dealing by corporate executives?
ANDERSEN’S PARTNERS CHART FIRM’S FUTURE TODAY (FARRELL)
1. Arthur Andersen was once the premier public accounting firm but a string of high profile financial
reporting disasters that culminated with the failure of Enron caused the demise of the once proud firm.
Andersen’s failure highlights the fact that the principal asset of a public accounting firm is the firm’s
reputation. Once the firm’s "credibility" is challenged its clients are no longer willing to pay for its
auditing services. What is it that a public accounting firm does that requires it to have a sterling
reputation for honesty?
2. Anderson’s initial lay off was 7,000 of its 26,000 employees before the firm completely collapsed and all
employees lost their jobs. However, all of Andersen’s clients still needed auditing services so in many
instances the employees continued to audit the same firms they had audited for Andersen, just for another
auditing firm. If the employees just moved from one firm to another, was there really a layoff? Did Andersen
employees really suffer from the demise of Arthur Andersen? Isn’t this also true of the Adelphia, Enron, and
WorldCom employees?
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Future implications
WORLDCOM SCANDAL BRINGS SUBPOENAS, CONDEMNATION (BACKOVER AND VALDMANIS); DOMINOS HIT WORLDCOM PARTNERS,
CLIENTS (KESSLER)
The financial press coverage of the failures of Adelphia, Enron, and WorldCom have focused principally on stockholders who have lost
everything they invested and creditors who stand to lose a portion of what they have loaned the company. However, other important
consequences of these high profile failures are often overlooked including: (1) the financial and emotional losses suffered by employees
who lose their jobs and face the prospect of a lengthy period of unemployment and possibly the dislocation costs of moving to another
community to find work, (2) the local community public services and school systems who lose valuable tax revenues, and (3) the budget
crises created for local charities and the arts that depend on corporate contributions for their continued survival. Bankruptcy courts
focus on the contractual obligations of the firm to creditors and suppliers. It has been argued that the corporation is a "guest" of the
society and as such has obligations to the entire web of stakeholders that have a financial stake in the firm’s survival. Should the claims of
these "silent stakeholders" also be considered when a firm fails?
About The Expert
John D. Martin,Ph.D.
Professor of Finance
Carr P. Collins Chair
Hankamer School of Business
Baylor University
From 1980 until 1998 John Martin taught at the University of Texas at Austin where he was the Margaret and Eugene
McDermott Centennial Professor of Finance. Currently holding the Carr P. Collins Chair in Finance at Baylor
University in Waco, Dr. Martin teaches corporate finance and financial modeling. His research interests are in
corporate governance, the evaluation of firm performance, and the design of incentive compensation programs.
Dr. Martin publishes widely in both academic and professional journals. Included among his academic publications
are papers in the Journal of Financial Economics, Journal of Finance, Journal of Monetary Economics, Journal of
Financial and Quantitative Analysis, Financial Management, and Management Science. Professional publications
include papers in Directors and Boards, Financial Analysts' Journal, Journal of Portfolio Management, and Bank of
America Journal of Applied Corporate Finance.
u Dr. Martin co-authors several books including the following:
u Financial Management, 9th edition (Prentice Hall Publishing Company)
u Foundations of Finance, 4th Edition (Prentice Hall Publishing Company)
u Financial Analysis (McGraw Hill Publishing Company)
u The Theory of Finance (Dryden Press)
Dr. Martin consults with a number of firms including Citgo, Hewlett Packard, Shell Chemical, Shell E&P, Texas
Instruments and The Associates.
Additional resources
Working Paper Series — Financial Engineering, Corporate Governance, and the Collapse of Enron
http://www.be.udel.edu/ccg/research_files/CCGWP2002-1.pdf
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