Adelphia Sues CPA Frm For Not Monitoring RigasesNov 7, 2002 | The Buffalo News Adelphia Communications is suing ex-auditor Deloitte & Touche, charging that the accounting firm stood by and watched while the Rigas family misused billions of dollars in company funds.
The lawsuit, filed Wednesday in Philadelphia, charges Deloitte with fraud, professional negligence and breach of contract.
"The Rigas family's self-dealing was not . . . concealed from Deloitte," the lawsuit said.
The auditor's actions contributed to losses in the billions of dollars as Adelphia fell into bankruptcy, the company said, but damages were left unspecified.
Deloitte hasn't seen the lawsuit and so can't comment on it, the firm said.
However, in a statement, Deloitte fired back that the independent board members who now run Adelphia "knew and approved of many of the acts complained of."
"To the extent there was fraud by people at the company, the purpose was to deceive Deloitte as well as the public," the accounting firm said.
Winning the lawsuit would generate money for Adelphia's creditors, but legal experts said proving the case will be difficult, especially in light of criminal charges filed against Adelphia's ex-officers.
Federal prosecutors have charged John Rigas and four other company executives with fraud and conspiracy, charges that Rigas has denied.
"Deloitte will defend itself by saying "We were lied to so badly,' " said Greg Bruch, a former Securities and Exchange Commission enforcement official, now in private practice at the Washington, D.C., office of Foley & Lardner.
Unlike Arthur Andersen, the accountant for Enron Corp., Deloitte was not charged by federal prosecutors in Adelphia's downfall. Nor has it been named in the U.S. Securities and Exchange Commission's lawsuit against Adelphia and its former officers, although the agency has said its investigation is continuing.
Independent directors ousted Rigas from control of the company in May, a month before Adelphia's bankruptcy filing. Erland E. Kailbourne, now interim chief executive of the company, served as chairman of the board's audit committee, whose role is to work with the auditor as a watchdog over management.
According to Adelphia's complaint, Deloitte knew that the Rigas family was borrowing money for which Adelphia was liable, but failed to alert board members or require full disclosure of the amount. The amount of the "co-borrowings" was $250 million in 1999, growing to $1.45 billion in 2000 and $2.25 billion in 2001. During the audit for 2000, Deloitte asked the Rigas family to disclose the amount of the borrowing, but backed down when the family resisted, the complaint said.
Deloitte was also aware of the "cash management system" in place at Adelphia, through which money was funneled to Rigas family ventures without the board's knowledge, the complaint said.
Adelphia said it fired Deloitte on June 9, after Deloitte suspended its audit. Auditor PricewaterhouseCoopers was hired and is working on Adelphia's annual report for 2001.
In its statement, Deloitte said it gave the company's outside directors a list of "open items" in May that required further investigation before the audit could be completed. Board members withheld information from their investigation but urged the firm to complete its audit, Deloitte said.
Although Adelphia's bankruptcy prevents it from suing Adelphia now, Deloitte said it will "seek remedies against the company and former and/or current Adelphia officers and directors who supplied Deloitte with erroneous and incomplete information."