Since Mar. 29, when Adelphia Communications first disclosed the existence of $2.3 billion in off-balance-sheet loans to the founding Rigas family, the cable-TV company has been on a roller coaster. Adelphia Chairman John Rigas and four other members of his family resigned in mid-May. Soon after, the Courdersport (Pa.) company released results from an internal investigation showing that the Rigas family had used the borrowed money to buy stock, timberland, and New York condos, as well as to build a golf course on a family-owned property.
On June 25, Adelphia filed for Chapter 11 bankruptcy protection. And more fireworks may be coming.
Auditors at Deloitte & Touche, the accounting firm that Adelphia dismissed on June 9, are required by law to respond to their dismissal by June 28 in a letter that Adelphia would then file with the Securities & Exchange Commission. In that letter, the cable outfit's ex-auditors are expected to claim that Adelphia's current board interfered with Deloitte's ability to conduct a full audit after the March revelations, according to a source with knowledge of the document.
Moreover, says this source, Deloitte will argue that Adelphia's board wanted to rush the audit to soothe creditors and help the cable operator avoid bankruptcy. Officials at Adelphia and Deloitte & Touche declined to comment for this story.
VOLUMINOUS REPORT. The finger-pointing between Adelphia and Deloitte has been going on for weeks, say sources with knowledge of the mutual accusations. Adelphia's independent board members, who took over after Chairman John Rigas and other family members resigned, have claimed that they weren't informed about many of the Rigas clan's transactions, faulting Deloitte for failing to properly monitor them.
After retaining its own auditors, a special committee made up of Adelphia's four independent board members released a 110-page report on May 24 outlining many of the transactions. At that point, the off-balance-sheet loans, which had grown to more than $4.5 billion, had been used to buy more than $1 billion in Adelphia stocks and bonds, help pay for the Buffalo Sabers pro hockey team, bankroll movies to be produced by a Rigas daughter, and pay for automobiles on behalf of a Rigas-owned dealership.
Sources acknowledge that the accounting firm was indeed the auditor for both Adelphia and the various ventures that the company and the Rigas family owned jointly, including several entities that bought cable systems. But Deloitte was not privy to the transactions by the Rigas family, say those same sources.
CHARGE AND COUNTERCHARGE. In Deloitte's letter explaining its side of the dismissal, the firm is prepared to argue that the first traces of the scandal came to light in February, 2002, as its auditors were sifting records for the audit of Adelphia's 2001 yearend financial report. At the time, sources close to Deloitte say, it found that the Rigas family had used $700 million of funds co-borrowed with the company to buy Adelphia stock. Those transactions were not publicly disclosed at the time. Deloitte also is prepared to assert that its auditors insisted that the Rigas family bring the matter to the Adelphia audit committee.
The simmering dispute between Deloitte and Adelphia first surfaced in Adelphia's June 9 SEC filing. In that document, Adelphia says Deloitte suspended its audit on May 14 and gave Adelphia executives a list of issues that needed to be resolved before the issuance of the company's annual report.
Adelphia says it was told by Deloitte that the audit couldn't continue because the cable outfit employed "executives who might have been involved in inappropriate conduct related to the company's financial reporting." Deloitte also stated in a letter: "To the extent that any of those persons have been involved in illegal activities, there is no way that we would be willing to rely on their representations, and indeed the mere fact that they remain in their positions raises additional concerns."
Adelphia's new management has since reassigned the employees identified by Deloitte to jobs outside the finance area. It also has brought in a new chief financial officer and chief accounting officer.
PREPARING FOR COURT. The accounting firm had yet another reason for refusing to continue the audit: Independent board members wouldn't turn over documents it felt were needed to complete the task, sources close to Deloitte say, and that's what it will argue in its dismissal letter. Adelphia turned over its audit duties to PricewaterhouseCoopers on June 13.
Deloitte's role in Adelphia's collapse will likely play a part in almost-certain litigation in coming months. Both Adelphia and Deloitte have already been named in shareholder lawsuits. Adelphia or its bankruptcy trustee might also file suit seeking to collect as much money as possible to repay debtors. Any discrepancies in the narrative of what happened at Adelphia could roil the waters even more. By Ronald Grover in Los Angeles