The cable TV company, now operating under bankruptcy protection, said Wednesday it had filed suit against its former outside auditor, Deloitte & Touche.
The lawsuit, filed in state court in Philadelphia, charges the accounting firm with professional negligence, breach of contract and fraud, among other misdeeds.
Wednesday's action is the latest litigation to arise from the activities of the Rigas family members that controlled the Coudersport, Pa.-based cable TV operator until they were ousted from the company earlier this year. Adelphia founder John Rigas, two sons and other Adelphia executives face federal charges of securities fraud. The feds say that the Rigases "systematically looted" Adelphia of $252 million in cash to meet margin calls, more than $420 million in company stock and $13 million to build a golf course on family-owned land. The Rigases have pleaded not guilty.
Deloitte & Touche said in a statement that it hadn't seen Adelphia's lawsuit, so it wasn't in a position to comment on it. However, the accounting firm says that Adelphia's board and its independent directors approved of many of the activities that the U.S. Attorney's office and the Securities and Exchange Commission have complained about. "To the extent that there was fraud by people at the company, the purpose was to deceive Deloitte as well as the public," says Deloitte.
Attacking Deloitte & Touche's role in what Adelphia calls "one of the most egregious instances of corporate self-dealing and financial chicanery in United States corporate history," Adelphia's new management makes a number of specific allegations:
- Deloitte failed to provide Adelphia, its audit committee and its independent directors with independent, competent audits.
- Deloitte knew about much of the Rigas family's self-dealing and looting, and Deloitte should have told the audit committee and independent directors about the wrongdoing.
- Despite the abuses, Deloitte didn't even send a letter to Adelphia management, which Adelphia says is customarily referred to as a "management letter," suggesting changes in Adelphia's corporate control practices.
- The Rigases couldn't have conducted their looting had Deloitte fulfilled its professional responsibilities.
- Deloitte told the Adelphia audit committee three days before the deadline for filing the company's 2001 financial statements that Deloitte had no significant issues with the nearly completed audit. Deloitte even told the audit committee's chairman, says Adelphia, that the 2001 audit was "one of the best audits of Adelphia" that Deloitte had ever produced.
In its Wednesday statement, Deloitte notes that when it suspended its audit of Adelphia in May, it told the company and its audit committee that a "long series" of open items had to be investigated and resolved before Deloitte could issue a report on the financial statements. Deloitte says it told the audit committee's chairman that certain items on that list represented possible illegal acts.
"Although there was a special committee of the company conducting the investigation, they refused to share material information with us about the investigation, while at the same time urging us to resume our audit," says Deloitte.
Yet more litigation may be in the works. "At the appropriate time," says Deloitte, it will pursue "remedies against the company and former and/or current Adelphia officers and directors who supplied Deloitte with erroneous and incomplete information."