Deloitte's audit team had been auditing Adelphia and Rigas ...



Statements from former Deloitte VP made at a subsequent case dated January 31, 2008

Deloitte's audit team had been auditing Adelphia and Rigas for numerous years.  The 2000 audit remained largely unchanged from prior years. The team consisted of about twenty staff accountants and tax professionals, divided into subgroups that were supervised by ten Deloitte managers and headed by senior manager William Caswell, who reported directly to Dearlove.

Several of the Deloitte managers had significant prior experience auditing and reviewing Adelphia's annual and quarterly reports: Caswell had spent six years working on Adelphia engagements; Ivan Hofmann and Robert Fitzgerald, both audit managers, had each spent five years. In addition, Michael Lindsey served as the concurring partner as he had on Adelphia audits since 1996, and Stephen Biegel was assigned as risk review partner after serving in that capacity for the 1999 Adelphia audit. Dearlove had once met Caswell at a firm meeting but did not otherwise know any members of the Adelphia audit team when he assumed his role as engagement partner.

Deloitte devoted an estimated 21,000 hours to the audit of Adelphia's 2000 financial statements and related accounting advisory activities; Dearlove himself spent over 700 hours. Dearlove spent a total of ten to fifteen days on-site in Coudersport with the audit team. Dearlove participated in discussions with the team, reviewed workpapers and underlying Adelphia documents when the team brought them to his attention, and "worked through the issues" with his staff in what Dearlove characterized as a "consultative process." At the end of the audit, Dearlove looked at certain workpapers and drew conclusions as to whether the team completed its review. Dearlove testified that he also consulted Deloitte's national office on a number of accounting issues during the course of the audit, mostly involving revenue recognition.

On March 29, 2001, Deloitte issued its independent auditor's report, signed by Dearlove, which stated that it had conducted its audit in accordance with GAAS and that such audit  provided a reasonable basis for its opinion that Adelphia's 2000 financial statements fairly presented Adelphia's financial position in conformity with GAAP.

Dearlove asserts that he could place some reliance on audit precedent. Moreover, in his view, the fact that prior auditors reached the same conclusions is "compelling evidence" that Dearlove acted reasonably.

Between 1996 and 2000, several Adelphia subsidiaries and some of the Rigas Entities had entered as co-borrowers into a series of three credit agreements with a consortium of banks. Although the agreements differed in the amount of credit available, their terms were substantially the same: each borrower provided collateral for the loan; each could draw funds under the loan agreement; and each was jointly and severally liable for the entire amount of funds drawn down under the agreement regardless of which entity drew down the amount.  

Combining the features of term loans and revolving credit lines, the agreements permitted co-borrowers to draw funds and repay the loans at will and required almost no principal payments until the loans began to mature in 2004. The amount of debt outstanding under the agreements therefore could fluctuate as co-borrowers drew down and made payments on the loans. Cross-default provisions in the agreements provided that it was considered an event of default if the borrowers failed to timely pay any other substantial debts – co-borrowed or otherwise – they had assumed, which would permit the banks to demand immediate payment of all outstanding amounts. The agreements also provided that an event of default occurred if the Rigas family lost its majority control of the co-borrowing companies.

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