TYCO ACCOUNTING SCANDAL OF 1990s - & its Consequences.pdf

HISTORY &
BACKGROUND
• Tyco Inc. was founded in 1960 by Arthur J. Rosenburg
• It is a diverse producing and serving corporation which was initially supported by
government research contracts
• It became a publicly owned company in 1964
• It launched its IPO in 1974 7 and got Listed on NYSE in 1974
• Between 1982 and 2000 it undertook several subdivisions. Tyco has done business in
over 1000 locations in 50 countries and hires 69,000 employees around the world .
• Tyco has made numerous acquisitions over the years, including 40 acquisitions since
the 1980s and has numerous companies among the Fortune 500
• The firm's revenue increased from $3.1 billion in 1992 to over $40 billion in 2004,
with the firm's market value estimated at over $100 billion

BACKGROUND OF SCAMSTERS
1. DENNIS KOSLOWSKI
❑ Kozlowski was born in Newark, New Jersey. He started his career in Finance in 1970
when he became an auditor in the ‘mergers and acquisitions’ department of SCM
Corporation, an old-style conglomerate.
❑ In 1976 Joseph Gaziano of Tyco Laboratories hired Kozlowski for the ‘Finance’
department. At the time Tyco had annual sales of only $20 million; Kozlowski was
involved in Tyco's decision to buy Grinnell Fire Protection Systems, a manufacturer of
automated sprinklers.
❑ He became vice president of finance for the new division in 1984 when it had zero profits
on sales of about $185 million. Within a year Kozlowski could claim $15 million in profits
on revenues of $255 million.

2. MARK SWARTZ
❑Mark H. Swartz was born in Boston in 1961. He enrolled at the
University of California, San Diego and graduated in 1981. He
holds a Political Science degree.
❑Swartz proved himself as an influential figure in the financial
world. He was headhunted from the audit firm Deloitte &
Touché in 1991.
❑Swartz is credited with most of the company's expansion
program. He joined the company as a financial consultant in
1991.

How the Fraud Happened
❑ 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.

Kozlowski Resigns ;
Accused of Tax
Fraud
Jun 3, 2002
Tyco Splits Into Four
Com Tyco Splits Into
Four Companies
Jan 22, 2002
Dennis Kozlowski
Hired as CEO
Feb 11, 1992
Tyco Shares Drop;
Kozlowski and Swartz
lie about selling Stock
Jan 30, 2002
Kowlowski and
Swartz accused for
stealing $170 million from
Tyco and taking $430
Million by fraud
Sep 12, 2002
TIMELINE OF
THE TYCO
SCANDAL

Successful
implementation of
Ethics Program at
Tyco
May 19, 2005
Mistrial Declared
by Court
Mar 17, 2004
Trial of Kozlowski
and Swartz Begins
Oct 7, 2003
Second Trial for
Kozlowski and
Swartz Begins
Jan 26, 2005
Kozlowski and
Swartz Declared
Guilty
Jun 17, 2005
TIMELINE OF
THE TYCO
SCANDAL

❑ • In 1999 the SEC began an investigation on accounting of
acquisitions, including "spring-loading"- underreporting pre-
acquisition earnings of an acquired company. However SEC took
no actions.
❑ • In January 2002, a tip drew attention to a $20 million payment
made to Tyco director Frank Walsh, Jr which was later explained as
a finder's fee for the Tyco acquisition of CIT.

❑ In June 2002, Kozlowski was investigated for sales tax evasion on $13 million in
artwork that he had purchased with company funds.
❑ Kozlowski resigned from Tyco "for personal reasons"
❑ Kozlowski, Swartz, and Bolnick were charged for failure to disclose information on
their multimillion dollar loans to shareholders.
❑ The SEC asked them to restore the funds in form of undisclosed loans and
compensations.

Auditor’s
Role
Questionable Auditing Practices by PricewaterhouseCoopers (PwC)
❑ The auditing firm PricewaterhouseCooper (PwC) responsible for
checking the financial reports of Tyco failed to identify Kozlowski’s
illegal financial transactions. PwC was accused of not exercising due
diligence in verifying the financial reports.
❑ As a result, Kozlowski’s unethical business practices continued,
leading to the involvement of various personnel in Tyco’s
organization. These practices became difficult to stop because of the
absence of constraining influence from the auditing firm.

1. Consequences on the Company
❑ The foremost and major challenge faced by the company was the loss that was incurred
because of the whole episode. It has been seen that the company during the whole issue
suffered a loss of 9.41 billion dollars.
❑ It also affected the goodwill of the company which
further resulted in the company hitting its lowest
value of the stocks.
❑ In December of 2003, the company seized its listing
of the shares in London due to low trading volume,
retaining the listing on the New York. Exchange.
CONSEQUENCES OF THE SCANDAL ON

❑ To revive the company, a new strategy including a wider restructuring
programme came into play which involved the shedding of more than 50
low margin non-core businesses.
❑ This further led to the termination of 7,200 employees from its payroll and
cessation of 219 facilities worldwide.
❑ The firm's credit ratings went on to poor state , and though the company
revived and increased the value of its shares, it faced a huge challenge in
recovering its image as 2000 cases were pending against the shareholders.
❑ Further, the company also kept facing several enquiries in accounting
systems along with accounting reviews for several years by the SEC .

2. Consequences on the Auditor
❑ PricewaterhouseCoopers, the firm that audited Tyco International when it was run
by Dennis Koslowski , has agreed to pay $225 million to settle claims of Tyco
investors.
❑ The Securities and Exchange Commission permanently barred
PricewaterhouseCoopers LLP partner Richard P. Scalzo from practicing before the
agency, calling him "reckless" for ignoring clear signs that officials of troubled
conglomerate Tyco International Ltd. were looting the company.
❑ PwC continued to audit Tyco's books. Tyco restated its financial results going back
to 1998. Its new executive team began working to reshape the massive company.

3. Consequences on the Scamsters
❑ A Manhattan jury in 2005 convicted Former Tyco
International CEO Dennis Kozlowski and former Tyco CFO
Mark Swartz for stealing more than $150 million from the
company, finding them guilty of grand larceny, securities
fraud and falsifying business records.
❑ They have been sentenced to eight and one-third to 25 years
for stealing hundreds of millions of dollars from the company.
❑ Dennis Kozlowski, the imprisoned former chief executive of
Tyco International Ltd, was ordered by a judge to forfeit
seven years of pay after looting the company, a sum that
could exceed $100 million.

4. Consequences on the Economy
❑ Electronics giant Tyco International Ltd is an example of a bankruptcy caused by
executive scandal and corporate excess. The collapse of Tyco, one of the world's
largest corporations with 240,000 employees, send shockwaves throughout the US
and global economy.
❑ The Securities and Exchange Commission today charged Tyco International Ltd.
with violating the Foreign Corrupt Practices Act (FCPA) when subsidiaries
arranged illicit payments to foreign officials in more than a dozen countries.
❑ Tyco, whose securities are publicly traded in the U.S., agreed to pay more than $26
million to settle the SEC's charges and resolve a criminal matter announced by the
U.S. Department of Justice.
❑ Many of its employees , at the time of the scandal , were affected gravely either
by termination and/or losses in their pension funds.

❑ Chairman and team make placards to make flow of meeting agendas ; given to
member prior meeting ; to track company’s activities.
❑ Stakeholders gets prepared to analyze company’s proposal & prepare to evaluate and
communicate company’s stakeholders.
❑ CEO should be asked for accountability
❑ BOD should make a strong power-responsibility mechanism.
Leadership style and behavior of CEO should be evaluated.
BOD should ask what company is doing and going on.
❑ On time information gathering helps auditors.
Remedies that could’ve been used

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