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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Enabling Adelphia
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Posted by: Jack Ciesielski 6/23/2006 6:11 AM
A story that's an echo of bubble years past: yesterday the SEC charged Scientific-Atlanta (now a unit of Cisco Systems) with aiding and abetting fraud at Adelphia Communications before that particular box of tinder exploded into flames. How did Scientific-Atlanta "aid and abet"?

Around August 2000, Adelphia asked Scientific-Atlanta to increase the price of digital cable television set-top boxes it was selling to Adelphia - then kick back the difference to Adelphia in as "marketing support" for moving the set-top boxes. Adelphia performed no such support, which is where the machinations get interesting: it capitalized the price increases paid to Scientific-Atlanta. When it received marketing support payments from Scientific-Atlanta, Adelphia treated them as a contra marketing expense, reducing its marketing expense - and increasing EBITDA.

(Those of you who believe EBITDA doesn't lie, take note.)

The SEC alleges that Scientific-Atlanta knew Adelphia was gaming the marketing support agreement while helping it along. Essentially, the charges were that the firm knew there was no substance to the transactions: they were designed to provide an unsupportable accounting appearance. Without admitting or denying guilt, Scientific-Atlanta is settling the charges for $20 million.
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