THE DISCLOSURES SUGGEST that Adelphia’s questionable accounting practices may be far broader than originally believed and are likely to raise new questions about the company’s core business as it tries to raise cash to stave off bankruptcy. The Coudersport, Pa., company is under investigation by the Securities and Exchange Commission and under criminal investigation by two federal grand juries, in Pennsylvania and New York. A special committee of the board is also conducting an internal investigation.





       Both the SEC and federal prosecutors are looking at the subscriber numbers, widely used by investors to gauge the company’s strength, and the capital-spending issue in their investigations, said people close to the situation.





       The SEC is also focusing heavily on the role Deloitte & Touche played as Adelphia’s auditor. Regulators are taking a close look at what Deloitte knew about related-party transactions, co-borrowing arrangements and subscriber inflation, said a person close to the situation. The SEC is concerned that Deloitte “knew things and didn’t bring them to the board’s attention,” this person said.





       Deloitte said in a statement that it believes “our work for Adelphia complies with all applicable professional standards and we are confident that a final review of the matter will demonstrate this to be the case.” The firm said that Deloitte’s “professional obligation of client confidentiality” prohibits it from commenting on what it disclosed to the board or audit committee.





       A person familiar with Deloitte’s thinking said that the auditing firm didn’t feel a need to report everything the controlling Rigas family was doing to the company’s audit committee because that committee included Timothy Rigas, the chief financial officer. However, Mr. Rigas stepped down from the audit committee in June 2001 to comply with NASD rules requiring independent directors. This person said that for some of the dealings, “it was the responsibility of management, not the auditor, to bring to the attention of the board.” Deloitte also claims to have been unaware of many of the transactions the Rigases were doing because the family didn’t provide adequate information over the years, this person said.





       The latest revelations come as Adelphia edges closer to filing for Chapter 11 protection under the U.S. Bankruptcy Code, according to people with knowledge of the situation. While no decision has yet been made on whether to file, Adelphia is running out of options and the board is now seriously weighing the possibility, these people said.





       The directors are expected to meet sometime over the next two days to get an update from advisers on the asset sale and to discuss the best course for Adelphia. But time is running out. The company faces a June 15 deadline to pay more than $50 million in interest expense to bondholders. While the company is trying to sell assets or raise as much as $1 billion in private equity, neither is happening quickly. “The more time that passes without a resolution, the more likely a bankruptcy option becomes,” said a person close to the company.





       While investigators have known for weeks that Adelphia appeared to have inflated its subscriber numbers, early estimates were that the discrepancies averaged about 60,000.





In recent days, however, investigators found new evidence suggesting Adelphia’s public subscriber counts were much higher than the count used in internal documents. The number represents between 7 percent to 10 percent of the company’s reported subscriber base of 5.8 million.





       Adelphia’s advisers briefed the SEC Thursday on its findings, according to people familiar with the situation.





       Adelphia representatives declined to comment on the report or the cable-subscriber numbers.





       According to people familiar with the situation, Adelphia’s publicly disclosed numbers were based on a more generous accounting system than the numbers used internally. For instance, in its public disclosures, the company counted customers who bought high-speed Internet connections as cable subscribers. It also counted connections to multifamily units as multiple connections — even though each unit may have had only one paying subscriber.





       In addition, the federal grand juries investigating the company are focusing on a transaction that involved a transfer of digital converter boxes to an entity owned by the Rigas family, which founded Adelphia. According to people familiar with the transaction, Adelphia made a bulk purchase of set-top boxes at a discount, and transferred $100 million worth of boxes to a Rigas partnership.





       Although the Rigas partnership paid for the boxes in the form of a company receivable, the partnership didn’t need the boxes for its own operations, these people said. The transaction had the net effect of artificially reducing Adelphia’s debt load by parking the unneeded goods in the Rigas-held entity. People close to the investigation said Adelphia also sought to boost its stature on Wall Street by inflating the amount of capital spending it was doing.





       While Adelphia told analysts it was upgrading about 50% of its cable-TV systems, people close to the investigation said the company actually rebuilt less than 40 percent.


       


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