Fraud Case

THE NATIONS saucySPAPER BS2003-01b Collegiate Case remove Adelphia f both flat, 2 newss, 2 others fetched in equalityody By David Lieberman and Greg Farrell www. usa immediatelycollege. com Accounting fraud Part II The results Creative accountancy is non a tonic-fang take technique, however it atomic number 50 sure enough be a costly adept. Businesses shade the pressure to appear profitable in order to attract investors and resources, but deceptive or fraudulent news report practices often channel to drastic consequences. Are these so-called creative practices al guidances illegal or asshole they ever be beneficialified?This model study leave alone resign examples of companies who induct used inappropriate accounting practices, the results of their deceptions and the governments plan to avoid approaching incidents. WorldCom s targetdal brings subpoenas, condmnation By Andrew Backover and Thor Vladmanis Andersens partners chart menages rising today By Greg Farrell Client-starved Arthur Andersen cuts 7,000 jobs By Greg Farrell dominoes hit WorldCom partners, clients By Michelle Kessler Adelphia plans to blame Chapter 11 Cable mansion postu noveled to seek bankruptcy safeguard today NEW YORK The waiting should be over today.Adelphia Communications plans to cross-file for bankruptcy protection, nearly troika months after the onceproud No. 6 seam operator first dis c relapsed dealings with the family of engrafter magic trick Rigas that moody it into a symbol of corpo in truth stain. The attach to is anticipate to announce that it has raised as much as $1. 5 gazillion from banks led by J. P. Morgan Chase and Citigroup to keep operating while a bankruptcy sound unwrap decides how creditors nominate be paid. A Chapter 11 filing the plumpinggest in rail line history could help efforts to find a sullyer for some, or all, of Adelphias corpses, which cause 5. 7 cardinal subscribers.The court can protect an acquirer f rom unpredicted liabilities, including those stemming from several shargonholder lawsuits and probes into Adelphias finances by both grand juries and the Securities and commuting agency. The play along could digest mutilate its estimated $19 billion in debt if it can sell systems for $3,500 per subscriber, roughly the industr y norm. exclusively stockholders could lose their entire investments. Adelphia sh ares closed Friday at 15 cents in over-the-counter trading. Case Study well(p) tail end D. Martin, Ph. D. Professor of Finance, Baylor University regular army care a shot SnapshotsPoliticians design in monitor phone line Opinion leading1 declare government should be more than heterogeneous in oversight and regulation of private enterprise2 52% 45% harbor Disagree Source Edelman Public Relations Worldwide/ StrategyOne Re pursuit spate of 400 respondents. 1 College educated 35- to 64-year-olds with household incomes of more than $100,000 2 Does non add up to 100% due to rounding By Darryl Har as welln Marcy E. E. Mullins, regular army instantly By Darryl Haralson andand Marcy Mullins, ground forces TODAY Reprinted with permission. All rights reser ved. AS SEEN IN USA TODAY MONEY sTION, MONDAY, JUNE 24, 2002And a sale may ruin Coudersport, Pa. , where Adelphia is bearingquartered. Its by far the largest employer in the rural, mountain town of 3,000. Meanwhile, Adelphia lead tr y to reassure its subscribers. Adelphia is committed to reversing its admittedly difficult present pecuniary situation, it wrote at last week to 3,500 franchise officials. Most importantly, in that respect should be no veer in swear out to Adelphia customers as a result of these developments. Adelphias downfall began on March 27, when it disclosed that a Rigas family partnership had borrowed $2. billion using alliance as circles 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. Barraged with questions, Adelphia put off release of its 2001 one-year report. More questions were raised when it was con tighted that the SEC was investigating. As the stock plummeted, Nasdaq weighed de harking Adelphia shares. That took rear on June 3. After acknowledging that it would affirm to restate its earnings, Adelphia put several production line systems on the block.The company defaulted on bank loans and failed to sack interest payments on bonds. And Rigas and sons Timothy, Michael and James were forced to relinquish their jobs and board seats. 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 bracing York, built a golf game course on Rigas- owned land, helped the purchase of the overawe Sabres hockey team, created a Rigas-run investment firm and subsidized a document ary film.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 NEW YORK For 50 years, conjuration Rigas lived the the Statesn Dream. Half a century ago, the son of Greek immigrants left a job making TV characterisation tubes at Sylvania. The World War II veteran bought a niggling movie house and a newfangled business a crinkle 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 the Statesn Nightmare.Wednesday, Manhattan U. S. attorney James Comey charge 77-year-old Rigas and twain sons Timothy and Michael with one of the largest and more or little egregious frauds ever perpetrated on investors and creditors. Rigas attorneys were unavailable for comment. With TV cameras capturing the humiliating moment, the founder of Adelphia Communications, the No. 6 U. S. cable company , was led away in chains here. He became the first CEO arrested in the latest wave of incarnate accounting scandals and the most vivid symbol of whitecollar crime since Michael Milken and Ivan Boesky in the 1980s. devil other former Adelphia executives, James Brown and Michael Mulcahey, were picked up in Coudersport. after in the day, Adelphia itself which filed for bankruptcy-court protection last month charged Rigas and his family with violating the Racketeer Influenced and mar Organizations (RICO) Act, in a filing in Federal Reprinted with permission. All rights reser ved. scalawag 2 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, JULY 25, 2002 failure Court in New York. The Rigases could be forced to pay three times any damages the court finds.The lawsuit alleges round $1 billion in damages. Behind their small-town facade, the Adelphia lawsuit says, the Rigases used their domination and mark of Adelphia, and their isolation from the exam of the outside world, to engage in one of the largest schemes of selfdealing and monetary wrongdoing in American corporate history. The umpire surgical incision and the U. S. postal Inspection Service charged the five executives with securities, wire and bank fraud, locution they looted Adelphia on a massive scale and used it as a personal piggy bank. Rigas private funds sloshed with Adelphias in the say(prenominal) 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 pecuniary problems at the cable company to relatively small-scale thievery. For example, Timothy was criminate of using a company jet for an African safari spend in 2000. Adelphias lawsuit adds that seats daughter, Ellen, used company planes to bring guests to her wedding to incision Venetis, who became an Adelphia board member.The couples cozy position enabled them to save $150,000 since 1998 They lived rent-free in t wo Adelphia-owned apartments on Manhattans 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 shut away time in the twist 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 hire 10 days to indict those arrested, and 20 days to charge others. Also Wednesday, the Securities and Exchange Commission filed a well-mannered lawsuit in U. S. District Court thats similar to the criminal complaint, and includes a third Rigas son, James. The SEC would bar the defendants from serving any unexclusively owned company. It also needs them and Adelphia to pay restitution and fines. Adelphia give tongue to in a debate that the claim against it would only ha ve the effect of further penalizing the companys stakeholders who were the victims of the Rigas improper conduct. The Adelphia cases are low-hanging fruit for prosecutors eager to show that theyre acquiring difficult on pink-collar criminals. This is an old fashioned hand-in-the-till case thats easier to prosecute than an esoteric fraud alike(p) Enron, says Jack Coffee, who teaches securities law at Columbia University. To prosecute Enron, youre liberation to have to teach the venire 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, youre talking more or less corporate looting.Every dishonored disposition arising out of this indictment should become a show-andtell in all business schools as the antithesis of unrestricted company management and stewardship. Talking tough, getting tough The arrests came as House and Senate negotiators agreed on tough measures, including jai l 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 catchs Wednesday. Thats the second biggest one-day point gain ever.That contrasts with the 179-point drop on July 9, when President pubic hair called for a new era of corporate responsibility. The arrests arent about Democrats and Re humankindans, says Lynn Turner, former chief accountant of the SEC under President Clinton. This is about investors, and they like what theyre seeing now. Even spate who arent 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 respectable Marian Salzman of Euro RSCG Worldwide. Theres 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 macrocosm led before the cameras in hand cuffs. Theyre actually going to look sympathetic, says Robin Cohn, author of The PR Crisis Bible. why would you Reprinted with permission. All rights reser ved. varlet 3 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, JULY 25, 2002 handcuff an old man? Hes not a liquidator and a rapist. Thats not to say they arent 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 cant imagine Saturday Night Live not doing anything with this. Corporate crime is in the spotlight these days. detain month, national prosecutors arrested former ImClone CEO Sam Waksal on charges of illegal trading on inside information and bar of judge. Their investigation has spread out to include friends and family of Waksal, who also might have illegally traded on inside information about ImClone last December.Investigators are trying to trammel whether any inside information was passed to Waksals friend Martha Stewart, who sold her ImClone stock besides before a Food and Drug Administration announcement, denying an application to food 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 departments Enron Task Force win one court battle last month when a Houston jury found auditor Arthur Andersen criminally guilty of obstruction of judge.It appears, though, that officials wanted to leap off with a bang as they arrested the Rigases. Whats unusual here is the direct 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 fifty-fiftytual defections among defendants. Here, it has leveled a wide range of allegations against upper management. That suggests that the government b elieves it has strong case and that they expect a rush to the prosecutors door by defendants who will vie to lessen 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 companys condition, they found and disclosed case after case in which the Rigases made no distinction between their personal funds and businesses and Adelphias.Bad news gets worsened But Adelphia was already in a tailspin. Investors lost confidence. Auditors refused to certify the companys financial reports. And lenders cut it off, leading the company to miss interest and dividend payments. Among the charges leading to the Rigases arr est 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 werent told. u That the Rigases secretly inflated Adelphias cable TV subscription total 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 tenacious high-speed profit work from the Rigases non-Adelphia systems. And earlier this year, they folded in plurality who ordered denture security services from Adelphia. u That they used accounting legerdemain to disguise Adelphias 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. That, commencement in 2000, Adelphia spent $13 million to build a golf club o n land mostly owned by John Rigas. u That in 1999, they told analysts that Adelphia could stick out 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 beach calls on their purchases as the companys stock price felled seam. Contributing Michael McCarthy Reprinted with permission. All rights reser ved. knave 4 AS SEEN IN USA TODAY NEWS SECTION, FRIDAY, JUNE 28, 2002WorldCom scandal brings subpoenas, condemnation Accounting rumors rattle Wall Street By Andrew Backover and Thor Valdmanis USA TODAY The accounting scandal that enveloped WorldCom reverberated through Wall Street and upper-case letter on atomic number 90. u Congress subpoenaed top WorldCom executives. u President Bush and Treasury Secretary Paul ONeill 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 bi ggest accounting frauds ever. Company officials said $3. 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. ONeill, a former chief executive of Alcoa, said in an interview on ABCs 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.Trading was halted for General Motors stock Thursday afternoon because of rumors of accounting irregularities. GM said they were un certain. Broadcast giant disentangle Channel Communications denied it is under an SEC investigation, yet its stock fell almost 13%. The House Financial Services Committee set a July 8 hearing into the Wor ldCom case. Subpoenas went to u Current WorldCom CEO John Sidgmore. u cause 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. Salomon Smith Barney telecommunication analyst Jack Grubman. in one case one of WorldComs 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 conjure up his Fifth Amendment right not to testify. Ebbers and Sullivan couldnt be reached. Salomon says Grubman will fully cooperate. And there could be more investigations. The House Energy and Commerce Committee told WorldCom to knead 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. Work ers will get severance pay, Burns says. Reprinted with permission. All rights reser ved. Page 5 AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, MARCH 28, 2002 Andersens partners chart firms emerging today By Greg Farrell USA TODAY NEW YORK Arthur Andersens U. S. partners will powwow in a nationwide teleconference today to determine the firms quick emerging. At issue who should lead the firms U. S. trading operations on an interim basis, and what steps Andersen should take to remain in business.According to senior partners briefed on the meetings agenda, Andersens 1,700 U. S. par tners will decide whether to ask Paul Volcker to assume control of Andersens internal 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 ult imate 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. While many obser vers think Volckers arrival could twist the J ustice Depar tment to drop the indictment, some Andersen partners are wary of organism the exit of an idealistic experiment in transforming the accounting industry. The partners will also discuss, and credibly 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. In other developments u At federal cour t in Houston, Contributing Thor Valdmanis J ustice Depar tment lawyers will respond to Andersens relocation to halt further grand jury testimony prior to a May 6 trial. If Judge Melinda Harmon sid es with Andersen, it will make the governments obstruction of justice case against Andersen more difficult to win. u Andersens top global partners will meet Tuesday in London to pick an interim CEO. Andersens 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 filling up clients leaving the firm. Reprinted with permission. All rights reser ved. Page 6 AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, APRIL 9, 2002 Client-starved Arthur Andersen cuts 7,000 jobsLong expected, layoffs offer first plain sign of firms distress By Greg Farrell USA TODAY 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 audit ing 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 Andersens 1,700 U.S. partners are also being let go. According to managing partner Grover Wray , most partners are still necessary to serve Andersens remaining clients. Rather than hand out severance checks to discharged 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 theyve been with the firm. During that period, these employees will keep their benefits and be free to use their office space to search for new jobs. 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 compete in Enrons 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 o f 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. every declined comment on Monday or denied the complaints allegations of complicity in Enrons collapse. Notably, Lerachs complaint leaves out two key players in Enrons demise Michael Kopper, who headed some of the special purpose entities that unplowed Enron liabilities off the companys balance sheet, and Ben Glisan, the former Enron treasurer criminate of facilitating some of Enrons ambiguous accounting practices.Glisan is now believed to be cooperating with the Justice Department probe of Enrons 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 lot Lerach. Finder says that if either of them is providing information, it would be to the J ustice Department first, where they face criminal liability. And the Justice Department wouldnt necessarily welcome a decision by a witness to cooperate in civil litigation. Reprinted with permission.All rights reser ved. Page 7 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 position and Wildlife service arent in telecom, but theyve already been hurt by the WorldCom scandal. Thats because they all did business with WorldCom, as did thousands of other companies. Now theyre all trying to figure out where they nucleotide 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 its unclear how accurate WorldComs 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 Chri pauseher Crespi.WorldCom provided about 10% of Junipers annual revenue, including less than $7 million this quarter, Juniper says. If WorldCom stops buying, that could dampen Junipers forecast for the year. It could easily subtract $50 million or $60 million off their top line, says Soundview engine room 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 didnt do business directly with World Com, 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 engineering science 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. Its in talks to work out a deal. RMH Teleservices has a five-year contract to provide customer service for WorldComs MCI division. That accounted for 19. 5% of RMHs 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 price were not disclosed.Now, that deal could be off, meaning fewer ads for Time magazine, cables TBS and the WB television network. WorldCom also provides service to the companys AOL Internet division. AOL says it has backup suppliers in case WorldCom service is disrupted. Satellite cable provider DirecTV is holding meetings to determine how to deal out its 4-month-old partnership with WorldCom. WorldCom was to provide the underlying network for part of DirecTVs high-speed Internet access service. Similar questions are being asked at Internet credential 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 weeks quartern of July fireworks Reprinted with permission. All rights reser ved. Page 8 AS SEEN IN USA TODAY MONEY SECTION, TUESDAY, JULY 9, 2002 celebration on the Mall in Washington was alleged(a) to be paid for by Wo rldCom, which has sponsored part of the festivities for five years. But the company pulled out. The National Parks Foundation scrambled to find new livelihood from AT. 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 get hold free training in math, science and the arts from the MarcoPolo project, which is sponsored by WorldComs munificence arm. Now, program administrators and partners including the National Geographic Society, American Association for the Advancement of acquisition and The Kennedy Center are tr ying to make the proj ect independent of the struggling company. Last week, they pulled WorldComs poundos from the MarcoPolo Web site. Theyre applying to make it a public charity, says Caleb Schutz, president of WorldCom Foundation. Theres a lot to lose if the company . . . pulled the plu g. For now, WorldCom still funds MarcoPolo. u Customers. The Texas Parks and Wildlife department spent last week printing temporary angle 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 cant switch providers but was forced to get a backup provider in case WorldCom fails. That means twice the bills. Its expensive, and at the end of the day, our clients pay for that, says CEO Adler. Reprinted with permission. All rights reser ved. Page 9 Behind the Story A Reporters Notebook The collapse of Enron and WorldCom, precipitated by revelations that both companies had twisted how profit able they were, threatens the health of the the nations stock markets.If investors cant believe earnings numbers issued by the biggest companies in the USA, they wont put their money into the market. And when investors take their money out of the market, as theyve been doing for more than two years, businesses suffer. They cant invest, they cant grow as quickly and they cant afford to hire more people. Greg Farrell specie reporter USA TODAY As the Enron and WorldCom examples demonstrate, theres no room in a public marketplace for creative accounting. Once a few cheaters are revealed, the integrity of the entire marketplace is wanton to question.Greg Farrell is a reporter in USA TODAYs notes section. He writes about fraud and white collar crime. In the quondam(prenominal) 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 ARRE STED IN FRAUD (LIEBERMAN AND FARRELL) 1. Adelphia sight 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 companys 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 Adelphias 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 clerical 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 firms owners or principals. How can stockholders protect themselves from the potential for self-dealing by corporate executives? ANDERSENS PARTNERS chart FIRMS FUTURE TODAY (FARRELL) 1. Arthur Andersen was once the premier public accounting firm but a string of high write financial reporting disasters that culminated with the failure of Enron caused the demise of the once proud firm. Andersens fail ure highlights the fact that the principal asset of a public accounting firm is the firms reputation.Once the firms credibleness 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 candor? 2. Andersons 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 Andersens clients still needed auditing services so in many instances the employees go along 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 sincerely a layoff?Did Andersen employees really suffer from the demise of Arthur Andersen? Isnt this also true of the Adelphia, Enron, and WorldCom employees? For more information, log on to http//www. usatodaycollege. com Page 11 Future implications WORLDCOM grease BRINGS SUBPO ENAS, 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 indite 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 peradventure the dislocation costs of moving to another community to find work, (2) the local community public services and school systems who lose valuable assess 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 argue d 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 firms survival. Should the claims of these mum 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. before long 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 document in the ledger of Financial Economics, Journal of Fin ance, Journal of Monetary Economics, Journal of Financial and Quantitative Analysis, Financial Management, and Management Science.Professional publications include document in Directors and Boards, Financial Analysts Journal, Journal of Portfolio Management, and Bank of America Journal of apply Corporate Finance. u Dr. Martin co-authors several books including the following u Financial Management, 9th fluctuation (Prentice Hall produce Company) u Foundations of Finance, 4th Edition (Prentice Hall Publishing Company) u Financial Analysis (McGraw Hill Publishing Company) u The guess of Finance (Dryden Press) Dr.Martin consults with a number of firms including Citgo, Hewlett Packard, Shell Chemical, Shell E, Texas Instruments and The Associates. Additional resources working(a) Paper Series Financial Engineering, Corporate Governance, and the Collapse of Enron http//www. be. udel. edu/ccg/research_files/CCGWP2002-1. pdf For more information, log on to http//www. usatodaycollege. com Page 12