2019 G.

C Tyco scandal

LEADSTAR COLLEGE OF MANAGEMENT AND

LEADERSHIP
Course Title : EDP Auditing
Department of accounting and finance

Complete analysis of Tyco company scandal

Prepared By: Abaynesh shiferaw

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2019 G.C Tyco scandal

Tyco International plc

Tyco company profile

Tyco International plc was a security systems company incorporated in the Republic of Ireland,
with operational headquarters in Princeton, New Jersey, United States (Tyco International (US)
Inc.).It was founded by Arthur J. Rosenberg in 1960,f ormed as an investment and holding
company with two segments: Tyco Semiconductors and The Materials Research Laboratory.

It is a global provider of security products and services, fire detection and suppression products
and services, and life safety products. Brand names include Tyco, Tyco Integrated Security,
SimplexGrinnell, Sensormatic, Wormald, Scott, and ADT (outside North American markets). The
revenue breakdown is 37% North America installation and services, 38% rest of world
installation and services, and 25% global products. Tyco completed its spin-off of ADT and the
flow control business in September 2012, five years after its prior three-way split.

In numbers the company had annual revenue of$17.36 billion in 2011 an operating income of
$2,119 million and a net income of $1,733 million measured in the same year.

It also had employees with key role playing people George Oliver(CEO)and Edward
D.Breen(chairman).And major people involved in the scandal include Dennis Kozlowski and
Mark swartz.

See the images on the next page .

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George Oliver Edward D.breen

Tyco's Scandal

About the scandal

The case of Tyco’s corporate scandal of 2002 focuses on the problem of unethical business
practice and related issues. Tyco was a large organization that grew through numerous
acquisitions.

Causes of the scandal

Unethical behaviors

Tyco’s case shows that ethics issues can occur in different parts of an organization. Supposedly
trusted leaders and executives with commendable background could exhibit unethical behavior
and get involved in unethical practices. Even outsiders or third parties could get involved in
these ethics issues. Thus, codes of ethics and relevant assessments of the organization must
include employees at all organizational levels, as well as significant third parties that interact in
operations. The major ethics issues in Tyco’s case were as follows:

 Unethical Leadership

 Unethical business practice of subordinates

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 Unethical auditing practice on Tyco’s business

Tyco’s Unethical Leadership. The unethical business practice of leaders was observed in
Kozlowski. Kozlowski was the main actor in the financial troubles and legal battles in this case.
Kozlowski was the main recipient of the money stolen from Tyco. In addition, he was the main
influential person who persuaded other top-ranking Tyco officers and lower ranking employees
to get involved and to keep silent to cover up for Kozlowski’s illegal activities. This case shows
that extensive involvement of Kozlowski and other leaders in unethical and illegal activity
brought Tyco down.

Unethical Business Practice of Subordinates. The complications in Tyco’s case involved

people other than Kozlowski. Kozlowski recruited the support of other high-ranking officers in
the organization. He also convinced some lower ranking employees to keep their silence in
exchange for financial benefits. Also, Kozlowski convinced one of the board members to keep
silent about the illegal financial transactions on the mansion Tyco paid for the benefit of
Kozlowski and his wife. In exchange, the board member received financial benefits.

Unethical Auditing Practice. The auditing firm PricewaterhouseCoopers responsible for

checking the financial reports of Tyco failed to identify Kozlowski’s illegal financial transactions.
As a result, Kozlowski’s unethical business practice continued and became extensive. These
practices became more difficult to stop because of absent constraining influence from the
auditing firm.

Kozlowski’s Motivation for Avoiding Sales Taxes on Art

Purchase

Kozlowski’s motivation for trying to avoid sales tax on his art purchases were his materialistic
desires, and his avoidance of raising a red flag on his illegal activities at Tyco.Kozlowski’s
materialistic desires pointed to greed for financial or material gains. These desires led him to
commit illegal financial transactions at Tyco. This case shows that Kozlowski had a history of tax

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evasion that goes even years before investigations started. Thus, he has a history of prioritizing
materialistic gains over ethical conduct.

Also, Kozlowski tried to avoid paying sales taxes for his art purchases because doing so would
raise red flags for authorities. Sales taxes create formal records of financial transactions. In
Tyco’s case, the sales taxes amounted to millions because the purchased art items were
expensive. It would have been easier for authorities to detect Kozlowski’s illegal financial
transactions because it was unusual for Tyco officers like Kozlowski to make such big purchases
in a small amount of time

Commingling of Assets in Tyco's Case

The concept of commingling of assets in Tyco’s case refers to the adoption of the view that the
assets of an employee are similar to the assets of the company. Commingling of assets occurred
when Kozlowski considered the assets of Tyco as his own personal assets. The case shows that
Kozlowski used Tyco’s funds to pay for his personal expenses. He used Tyco’s money to pay for
his second wife’s birthday party. He also used Tyco’s money to cover the costs of properties he
purchased. He used the company’s money to purchase household items and art pieces for his
personal use.

Tyco’s case shows that commingling of assets made it easy for Kozlowski to use the company’s
assets for personal needs. The company had programs that enabled Kozlowski to unethically
use assets for personal needs. Kozlowski’s use of Tyco’s money was not just mere stealing of
funds. It was also an exploitation of the weakness of the financial loopholes in the firm at the
time of his leadership.

Board of directors' inability toidentify,adjust and correct illegal practices.

It would have been possible for the board of directors to see the adjustments taking place in
programs at Tyco. This would have been so if the board of directors had appropriate mindsets
and activity. Tyco’s programs were a weakness in the organization. These programs provided

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benefits to officers and other employees. The financial programs were opportunities for
Kozlowski’s illegal financial transactions and unethical business practices.

The board of directors should have examined these programs to evaluate their appropriateness.
The directors should have identified the programs’ weaknesses and loopholes, which Kozlowski
and other officers exploited for their own personal benefit for years. Thus, the ineffectiveness
of the board of directors in examining Tyco’s programs enabled Kozlowski’s unethical business
practices.

The role of the auditor in the scandal

As for the internal auditor he was Richard Scalzo and during the time of the occurrence of the
scandal he was aware of the violations of GAAS.And then he mislead many stakeholders and
SEC with inaccurate financial statements,overstating the net income of the company and
understanding the expenses .He was finally denide from practicing as an accountant .

Tyco International Ltd. had become a headache for its outside auditor
PricewaterhouseCoopers LLP, whose work is under the microscope of a small army of
investigators poring over several controversial deals that happened on the accounting firm's
watch.

PricewaterhouseCoopers had once said it was co-operating as an "information provider" with

the Manhattan district attorney's office on its probe of Tyco. A spokesman for the firm declined
to comment on the information requested by investigators.Tyco also confirmed on the same
day that the conglomerate's accounting treatment of nearly $100-million (U.S.) in secret loans
is part of the second phase of an internal investigation led by lawyer David Boies. One key
question for the Boies team, which includes forensic accountants, is whether audits by PwC
uncovered about $96-million in unauthorized payments for a group of employees that included
indicted former chairman Dennis Kozlowski.

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The Wall Street Journal reported yesterday that Manhattan prosecutors are investigating
whether the accounting firm knew about the secret bonuses and the methods used to hide
them.Richard Scalzo, the PricewaterhouseCoopers partner who oversees the Tyco account, did
not return a phone call seeking comment.The scandal at Tyco is just the latest disclosure
proving to be an embarrassment for PricewaterhouseCoopers.

In July, the firm agreed to pay $5-million to settle charges brought by the U.S. Securities and
Exchange Commission that its auditors approved improper accounting and that it violated
independence standards for several clients in the past. It was the second largest payment ever
by an accounting firm to the market's top regulator.

During Mr. Kozlowski's tenure, Tyco became a lucrative client for PricewaterhouseCoopers,
which collected $50.1-million in fees from the conglomerate in 2001. Before his indictment, Mr.
Kozlowski also served as chairman of the audit committee at U.S. defence contractor Raytheon
Co., which paid PricewaterhouseCoopers $84-million in fees in 2001, out of which only $4-
million was for auditing services.The bulk of that amount, $58-million, was for consulting on the
design and implementation of a new financial information system at Raytheon.Mr. Kozlowski
resigned from Tyco and Raytheon's board in June afterwards.

Partners in crime

Dennis Kozlowski
Dennis Kozlowski was the CEO of Tyco before he was convicted of various
corporate crimes and sentenced to prison in 2005.Dennis Kozlowski was
named CEO of Tyco in 1992 and is credited with a series of successful
mergers and acquisitionsas well as Tyco’s expansion in the late 1990s.
Kozlowski became notorious for his extravagant lifestyle, and he was
indicted for tax fraud regarding purchases of fine art. In June 2005, he was convicted of
misappropriating more than $400 million of Tyco’s corporate funds.

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Mark Swartz
Mark Swartz is best known for the 2002 Tyco corporate fraud scandal that
lead to jail time Mark Swartz was accused by the SEC of taking loans out
while CFO at Tyco, along with CEO Dennis Kozlowski. The original trial was
ruled a mistrial because of the behavior of one of the jurors. At the retrial
both men were convicted on most accounts of fraud and sentenced to at
least 8 years.

Summarized process and fate of tyco

Summarized process

According to the Tyco Fraud Information Center, an internal investigation concluded that there
were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did
happen? Tyco's former CEO Dennis Koslowski, former CFO Mark Swartz, and former General
Counsel Mark Belnick were accused of giving themselves interest-free or very low interest loans
(sometimes disguised as bonuses) that were never approved by the Tyco board or repaid. Some
of these "loans" were part of a "Key Employee Loan" program the company offered. They were
also accused of selling their company stock without telling investors, which is a requirement
under SEC rules. Koslowski, Swartz, and Belnick stole $600 million dollars from Tyco
International through their unapproved bonuses, loans, and extravagant "company" spending.
Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million dollar birthday party for
Koslowski's wife in Italy are just a few examples of the misuse of company funds. As many as 40
Tyco executives took loans that were later "forgiven" as part of Tyco's loan-forgiveness program,
although it was said that many did not know they were doing anything wrong. Hush money was
also paid to those the company feared would "rat out" Kozlowski.

Essentially, they concealed their illegal actions by keeping them out of the accounting books
and away from the eyes of shareholders and board members.

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The fate of Tyco

The Securities and Exchange Commission (SEC) investigated Tyco’s financials in 1999 when the
company restated its earnings causing suspicion (Giroux, 2008). In 2002, The Manhattan district
attorney accused Kozlowski of massive sales tax evasion which prompted a further investigation
into Tyco’s illegal activities (Kaplan, 2009). For example, Tyco had forgiven a $19 million interest
free loan to Kozlowski, even paying his income taxes on the loan. The company’s stock price
resulted in an overvaluation due to these insidious events (Joyner and Raiborn, 2005).
Kozlowski and Swartz had sold 100 million dollars’ worth of shares and then declared to the
public that they had kept the stock which was misleading and a misrepresentation to its
investors (Smith, 2002). Moreover, it is common practice to benchmark portfolio performance
and question those results when unusually higher or lower than industry standards (Wong,
Leung, and Gilleard, 2013). These radically high results should have raised suspicion by the
investors and led them to make serious inquiry as to how Tyco was achieving those results.

Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120
million without the approval of Tyco's directors, abusing an employee loan program, and
misrepresenting the company's financial condition to investors to boost the stock price, while
selling $575 million in stock. Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a
$100,000 civil penalty for his role. Since replacing its Board Members and several executives,
Tyco International has remained strong.

 Sources

o https://www.scribd.com https://prezi.com

o Wikipedia Encyclopedia Britannica

o Encyclopedia Britannica

o panmore.com › tyco-corporate-scandal