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CLEMENTE, Charisse B. Audit Theory MWF 7:30-9:30 Tyco International Scandal I.

Company Profile

Tyco International, the company was one of America's largest conglomerates, founded by Arthur J. Rosenburg which operates in 100 countries with operating revenues of 38 Billion Dollars and 267,000 employees, worldwide. Tyco Laboratories began operations in 1960, performing experimental work for the U.S. government. The firm went public in 1964 and quickly expanded, mostly by acquisition, to exploit the commercial applications of its work. Tyco manufactures a wide variety of products in several different industries: Electronics, Fire & Security, Healthcare, Plastics & Adhesives, and Engineered Products & Services In 1974 its stock was listed on the NYSE. Between 1982 and 2000 it undertook several subdivisions.

II.

Problem Dennis Kozlowski joined the company in 1975 as an assistant controller. The company

subsequently shifted its focus from growth to profits within its three primary divisions: fire protection, electronics, and packaging. Kozlowski joined Tyco's board in 1987 and became president and chief operating officer two years later. Kozlowski engineered a coup to become Tyco's chief executive officer (CEO) in 1992 and the chair of the board in 1993. He diversified the company, branching into health care. Tyco eventually became the second largest producer of medical devices in the United States. On December 5, 2001, the Tyco shares were trading for 59.76 on the NYSE. Tyco's former CEO Dennis Koslowski, former CFO Mark Swartz, were accused of giving themselves interest-free or 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 and Swartz 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
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CLEMENTE, Charisse B. Audit Theory MWF 7:30-9:30 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. Essentially, they concealed their illegal actions by keeping them out of the accounting books and away from the eyes of shareholders and board members. Parties Involve: The primary people that were identified for responsibility of the scandal were Dennis Kozlowski and finance chief, Mark Swartz. Kozlowski joined the company in 1975 as an assistant controller at Tyco. He worked in the company during a time of rapid expansion and moved to the board of directors in 1987, become CEO in 1992, and became chairman of the board in 1993. Kozlowski was known for his vicious acquisitions, and gained a lot of attention by his extremely lavish lifestyle. Mark Swartz was the Chief Finance Officer of the company and worked under Kozlowski. It was determined during trial that the two had worked synonymously in committing fraud, and working against the shareholders. Both of them ended up receiving the same punishment for their dual efforts in committing the crimes. By the time the dust had settled, 220 of the 250 top managers had been replaced for either not catching the theft, or for allowing it to happen, openly. The remainder of the 250 top managers resigned shortly after.

Discovery of the Fraud In 1999 the SEC began an investigation after an analyst reported questionable accounting

practices. This investigation took place from 1999 to 2000 and centered on accounting practices for the company's many acquisitions, including a practice known as "spring-loading." In "springloading," the pre-acquisition earnings of an acquired company are underreported, giving the merged company the appearance of an earnings boost afterwards. The investigation ended with the SEC deciding to take no action. In January 2002, the accuracy of Tyco's bookkeeping and accounting again came under question after a tip drew attention to a $20 million payment made to Tyco director Frank Walsh, Jr. That payment was later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002, Kozlowski was being investigated for tax evasion because he failed to pay sales tax on $13
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CLEMENTE, Charisse B. Audit Theory MWF 7:30-9:30 million in artwork that he had purchased in New York with company funds. At the same time, Kozlowski resigned from Tyco "for personal reasons" and was replaced by John Fort. By September of 2002, Kozlowski and Swartz were gone and charges were filed against them for failure to disclose information on their multimillion dollar loans to shareholders. The fraud includes: Undisclosed compensation, Secret loans, Undisclosed related-party transactions, Fraudulent stock trading

About the victims There was one victim in this case, the company, Tyco. This victim consisted of the

employees, the shareholders and everyone who had a stake in the company at the company. When this theft occurred, the whole company suffered immensely, the stock prices fell sharply, and the people involved are the ones that experience problems.

III.

Civil Trial District attorney issues a criminal indictment against Kozlowski for evading more than 1

million dollars in taxes for fine art purchases. By September 12, 2002 the entire plot had unfolded and the District attorney issues another criminal indictment that accuses the defendant of enterprise corruption by stealing over 170 million dollars from Tyco and obtaining 430 million dollars by committing fraud against the company. On October 7, 2003 the trial of Kozlowski and Swartz begins. The trial began with a statement from the defense team, in which Kozlowski and Swartz were portrayed as crime bosses who looted the business, with no regard for anyone but themselves. The defense opened with statements that they were good and honest men that were being portrayed as criminals by the media. On October 28, 2003 the jury was shown video tape of Kozlowski at his wife's birthday party, where he spent 2.1 million dollars for one night, billed to Tyco. Another hit to the defense was when the jury was shown a picture of his 6,000 dollar shower curtain. This occurred on November 25, 2003. On April 27, 2005 Kozlowski takes the stand, and testifies that all the money he had obtained had been done so legally and that he was fully entitled to. This was a twist as well,

CLEMENTE, Charisse B. Audit Theory MWF 7:30-9:30 because Kozlowski had not taken the stand in the first trial. Finally, on June 17, 2005, Kozlowski and Swartz were found guilty of all charges. Kozlowski and Swartz are charged with: Corruption Conspiracy Grand larceny Falsifying records the losses they caused Tyco are estimated at $600 million. IV. Implications The company re-structured their management, firing a total of 9 executives on their board. Most notably, Edward Breen was hired as the new CEO and David FitzPatrick was hired as the new CFO. On May 6, 2003 a new ethical guide was distributed to all employees

Possible Precautions Companies could more closely monitor their employees for unethical conduct The government could monitor accounting practices of companies more closely Any executives of companies who exhibit suspicious behavior should be closely watched