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Tyco Scandal (2002) : (Acc C607-302A Auditing and Good Governance)

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TYCO SCANDAL

(2002)
(ACC C607-302A AUDITING AND GOOD GOVERNANCE)

Dumandan, Kenneth R.
Dupaya, Jericho Lorenzo
Encila , Richard jr.
Gabato, Rohany Joy
Galindez, Elizabeth

BSA 301-A
September 30, 2021
Table of Contents
I. Executive Summary
II. Introduction
2.1 Key Decision Criteria
2.2 Rationale
2.3 Corporate Culture of Tyco
III. Body
3.1 Key Issues of Tyco Scandal
3.2 Mechanism of the Key Issues
3.3 Two worst violation in Code of Conduct
3.4 Data Analysis
3.5 Individuals Involved
3.6 Root Cause of Fraud
3.7 Summary in Detection of Scandal
3.8 Results of the Scandal
3.9 Criminal Offenses and Penalties
IV. Recommendation and Conclusion
4.1 Recommendations
4.2 Conclusion
V. References
VI. Appendices
6.1 Table 1.0 Comparative Financial Report Of Operating Income
(Reported Vs Restated, Fr. Yr 1998-2002)
6.2 Table 2.0 Comparative Statement Of Cashflow
(Reported Vs Restated, 2000-2002)
I. Executive Summary
The Tyco Scandal in 2002 was driven by individual greed by CEO Kozlowski and
CFO Mark Swartz who manipulated corporate loan programs in order to get board and
shareholder approval and give themselves unauthorized bonuses. They would then see to it
that the “loans” used to purchase personal expensive expenses would later be forgiven. But
that wasn’t the online crime that the CEO and CFO committed. The two failed to disclose to
investors the sale of a combined 7.5 million shares valued over a 400 million dollars. But
they dis not stop there, two also inflated Tyco’s value by falsifying proxy statements. An
investigation of unpaid sales tax of an expensive artwork Kozlowski purchased using Tyco’s
fund led to the discovery of similar expense and the scheme was finally uncovered. Both of
them were sentence up to 25 years in jail and were forced to pay $235 million dollars
combined restitution and criminal fines. In 2007, Tyco agreed to pay a total of 2.975billion
dollars to settle a lawsuit filed in behalf of the investors.

II. Introduction

Arthur J. Rosenburg, a Harvard science Ph.D., founded a research facility in


Waltham, Massachusetts, in 1960 to conduct federal experiments. Rosenburg formed Tyco,
Inc. two years later and ventured into the commercial sector. Tyco produced high-tech items
for the market after assembling a team of outstanding researchers. A silicon carbide laser was
one of Tyco's early technical accomplishments. At room temperature, this laser was the first
blue-light laser and the first to shoot a continuous beam. Other successful research initiatives
resulted in the development of the Dynalux battery charger, which never overcharged a
battery Tyco went public in 1964. Tyco International Ltd. is a multi-billion dollar
manufacturing and service corporation with five major divisions. Tyco Fire and Security is a
global leader in fire detection, protection, and suppression systems design, production,
installation, monitoring, and servicing, as well as electronic security services.

Tyco Laboratories needed a substantial restructuring towards the end of the 1960s to
get its new units in line. As Wall Street became disillusioned with high-tech businesses, the
price of company shares had plummeted substantially from its peak in the mid-1960s. In
1969, Tyco sold a number of underperforming businesses and re-evaluated its strategic
strategy. Tyco began its third major acquisition in November 1976 when it bought 13 percent
of the Philadelphia-based process-control designer and manufacturer Leeds & Northrup
Company. Tyco was prevented by a court-approved agreement from gaining more than 19
percent of Leeds & Northrup until March 1978. In January 1978, Tyco gave up its attempt to
acquire Leeds & Northrup, and sold its 19 percent interest to Cutler-Hammer for a $9.2
million profit. In 1982 Gaziano died suddenly at the age of 47. During his decade at the helm,
Tyco Laboratories' sales increased from $34 million to more than $500 million. In 1987
Tyco's sales passed the $1 billion mark. Tyco paid $350 million in 1988 for the Mueller
Company, a 132-year-old water and gas pipe manufacturer. Tyco also boosted its fire
protection sector in 1990 when it paid $642.5 million in cash, shares, and a warrant for
Australia-based Wormald International Limited.

Tyco grew rapidly in the 1990s and early 2000s, with sales rising from $3.07 billion
in 1992 to $34.04 billion in 2001, thanks to an ambitious acquisition spree that saw the
corporation spend an estimated $62 billion buying over 1,000 businesses. However, the
architect of this rise, L. Dennis Kozlowski, left under a cloud in June 2002, and he and Mark
H. Swartz were eventually charged with stealing $600 million from the business and its
stockholders. Tyco struggled to remove the scandal's stain, and was grouped in alongside
companies like Enron Corporation and WorldCom, Inc. as key emblems of the 1990s boom
economy's excesses and greed.

2.1 Decision Criteria


Decision Criteria Description
Problems  What are the key issues of the case?
 What is the mechanism or how do
they undertake the fraud?
Participants  Who are the main perpetrators for
the conduct of fraud?
 How did they involve in the case?

Process  What is the root cause of the fraud?


 How did the problem arise?

Effects  What are the effects to the entire


company, stockholders, and the
general public?
Violations  What was the worst Code of
Conduct violated?
2.2 Rationale
This paper discussed about Tyco International Scandal (2002). It mainly focuses on
the unethical business practices among top-rank officers and other executives in committing
fraud. This also discussed the misappropriation of asset resulting to misleading of financial
statements in concealing fraud. Moreover, this further emphasize the importance of Corporate
Governance and Internal Control in evaluating the business environment towards
management ethical behaviour. This also attempts to give sort of recommendation to evaluate
fraud and minimized fraudulent activities internally.

2.3 Corporate Culture of Tyco

An organization’s culture often impacts the success of achieving the common


organizational goal of increasingshareholder profitability (Vanourek and Vanourek, 2013).
Frequently, the pressure put on company executives is withoutregard to how they will meet
these expectations, and only results matter. There is an expectation by companystakeholders
that financial executives exhibit leader stewardship and behave ethically beyond achieving
the goal ofoperational sustainability and profit maximization (Vanourek and Vanourek,
2013). They should do so even if it costly anddifficult to do. According to Daniels Fund
(n.d.), Kozlowski humiliated those who failed to meet his high profit expectationsand
rewarded those who achieved his inflated financial goals regardless of the means. The events
during Kozlowski’sreign reveal that the Tyco culture did not display leader stewardship nor
did it engender a spirit of organizational trust.

III. Body

3.1 Key Issues of Tyco Scandal


Tyco International’s corporate scandal in 2002 mainly highlights issue on unethical
business practices perpetrated by its top-ranking officers, CEO Dennis Kozlowski, CFO
Mark Swartz, and other executives which led to a $150 million stolen money from the
company and inflation of around $500 million company’s reported income. This involves
ethical issues such as unethical leadership and unethical practice of subordinates as well as
resulting in an accounting scandal. Accounting fraud is another issue in the Tyco scandal that
involves a conflict of interest. Accounting fraud is defined as an intentional effort to
manipulate a financial organization through the manipulation of financial statements.
Because it involves fraud, which is illegal under written law, it might be one of the legal
concerns in this case. The conflict of interest emerges in this instance because Tyco
International's auditors, accountants, and executives erode confidence, and their personal
interests have diverged significantly from those of Tyco's owners and stakeholders. They
repeatedly put their own interests ahead of the integrity of financial reporting data.

3.2 Mechanism of the Key Issues


Unethical Leadership and Unethical practice of subordinates.
Daniels Fund (n.d.), indicates that Kozlowski’s leadership was unethical and without
regard for its employees and other stakeholders as he is the primary recipient of money stolen
from the company. His unethical and illegal actions did little to gain trust from his employees
or other stakeholders and caused the company great financial harm. He used his position to
persuade top-ranking Tyco officers and lower ranking employees to get involved with the
fraudulent act in exchange of financial benefits. Consequently, the firm's assets were
commingled, and the CEO and CFO began to spend corporate funds for personal
expenditures. When Kozlowski made Tyco pay $30 million for his apartment and $14.7
million for an artistic painting, was an example of commingling. All of this became easier to
manipulate because the firm already had procedures in place that allowed for such misuse of
the company's assets. In addition, Kozlowski used company’s money to purchase a $6,000
shower curtain for his personal home and spending $2 million dollars on his wife’s birthday
party, disguised as a shareholder meeting (Neal, 2013).

The fraud was carried out by the CEO and CFO, who took out loans with extremely
low-interest rates, often disguised as bonuses, that were not approved by the board and never
paid back. Some of these "loans" were given as part of the company's "Key Employee Loan"
program. Tyco's loan forgiveness scheme resulted in up to 40 loans being "forgiven.".
According to an attorney from Manhattan district who’s scrutinizing the case after the
evasion of income tax for some purchases of fine arts, they further found out that $10 million
loans completely forgiven by the corporation while all interest got billed to the company’s
account. And on January 2002, it was also uncovered that the director (Walsh) had received
$10 million transaction for organizing a purchase of CIT group. It's important to keep in mind
that many people were unaware they were doing something unlawful. Money had also been
paid out purchasing their silence about Kozlowski’s actions in the company through the
company programs. As a result, the top branch of Tyco's leadership was further tainted,
allowing Kozlowski to grow bolder over time. Combined, Kozlowski and Swartz had also
sold $430 million worth of company stock without informing investors (lawyershop.com).
Essentially, they concealed their illegal actions by keeping them out of the accounting books
and away from the eyes of shareholders and board members. Although, factors such as their
current organization culture under CEO Kozlowski contributed to this fraudulent action.

Accounting Scandal
Tyco took advantage of the phrase "acquisition" in the financial world and used
accounting flaws to deceive investors. Tyco used a unique path of acquisitions to win the
approval of market watchers with exceptional and incredible financial success. Throughout
that time, it was entirely focused on showing exceptional achievements while ignoring the
weak organic growth it had. It acquired numerous firms and insisted on pursuing that strategy
for a few years, using a cunning gimmick to disguise slow organic development by inflating
the CFFO through acquisitions and disposals accounting methods. Tyco's deception involved
switching between two areas of the cash flow statement: operational and investment cash
flows, specifically the acquisitions accounts. Tyco deceived and carried the outflow through
the investment portion instead of the operational one. This has a favourable impact on the
CFFO, as it shows high quarterly statistics.

When it acquires another company, it may do so in one of two ways: either by


exchanging stock for cash, which is a cash outflow; or by paying cash, which is an
investment outflow under accounting laws. When Tyco acquires a company, it becomes
entitled to profit from the acquired company's new inflows. In this situation, all of the
acquired company's revenues are reported as sales on Tyco financial statements, and the same
is true for all other accounts that fall under one company. This had a strong effect on CFFO's
performance since new revenue streams from new companies were added, improving the
operating section. If you do this repeatedly over a few years, it will definitely have a huge
impact.

Tyco used false accounting methods to exaggerate its profits. It is important to have a
larger number of contracts with new customers in order to increase a company's profitability.
In most cases, a company can do so through its sales department or through dealerships,
which are considered an external network. Tyco, on the other hand, utilized both approaches
but relied primarily on dealerships. Tyco benefitted greatly from a gimmick in which it used
several sales forces from dealers as an outsourced service, therefore not putting them in the
expenses legend as payroll, but as they are selling security contracts. Tyco paid each new
customer contract with an $800 payment. Tyco falsified accounts by classifying these
payments as "acquisition to contracts," which was the major issue in entering them into
financial statements. As a result, in the cash flow statement, this is now an investment
outflow rather than an expense. Doing so would overstate operating cash flow. Tyco, on the
other hand, appeared to enjoy this act and worsened the situation by engaging in yet another
fraud.

This time, Tyco created a new bogus charge that brought millions into the company. It
created a "dealer connection fee," which is a $200 charge made by the dealer for each
contract Tyco purchases. It receives a $200 operational inflow into its cash flow in this
scenario. As a result, the dealers will be irritated since the net profit of a contract will be
reduced to $600 from $800. Tyco, on the other hand, had already considered this and had just
increased the purchase amount to dealers from $800 to $1000.This payment is typically
called “growth bonus.” Also, Tyco immediately recognized the $200 connection fee in its
income statement, while the offsetting $200 growth bonus was amortized over ten years. As a
result, Tyco inflated its operating income by approximately $567 million from its fiscal year
ended September 30, 1998, through its fiscal quarter ended December 31,2002. The $200
connection fee paid by the dealers was wholly offset by the $200 growth bonus that the
dealers received. Accordingly, the $200 connection fee and the offsetting $200 growth bonus
did not alter the economic substance of ADT’s purchase of a security monitoring contract and
should not have been recognized under GAAP. Hence, under the circumstances, they violated
GAAP principle. The scheme also artificially increased Tyco's operating cash flow. From its
fiscal year ended September 30,1998, through its fiscal quarter ended December 31,2002,
Tyco's operating cash flow was overstated by approximately $719 million due to the
accounting treatment given the dealer connection fee. Tyco received no additional cash in the
dealer connection fee transaction, yet it failed to adjust its cash flow from operations to
reflect this reality.

3.3 Two worst violation in Code of Conduct


With this regards CEO Kozlowski has committed two of the worst violations to ethical codes
in the case:

1.) He kept lying to the shareholders by telling them he doesn’t sell his stock. He was
telling this because he wanted the investors to keep pumping money into the company
while he sold his stock. He created a delusion for the investors that he is confident
about the investment. While he was turning around and putting his money elsewhere.
He knew that the share of Tyco will drop its value due to its fraudulent actions.

2.) The other repulsive ethical violation Kozlowski made was his claims of making
donations to charity. He kept begging for lenience grounding on the high numbers of
money he gave to charity while this money was stolen from others. He used these
donations as “tax shield” for his fraudulent operations. His intentions were entirely
unethical and he fooled around with people who trusted him for his own personal
gain.

3.4 Data Analysis

YEAR ENDED OPERATING INCOME (in $ millions)


(Fiscal)
Reported Restated Increase or
(decrease)
09/30/1998 1,948.1 1,884.0 64.1
09/30/1999 2,190.8 1,985.4 205.4
09/30/2000 5,474.4 5,198.0 276.4
09/30/2001 6,186.8 5,616.4 570.4
09/30/2002 (1,579.0) (1,452.4) 126.6
Cumulative 989.7
increaseor
(decrease)

YEAR ENDED CASH FLOW FROM OPERATIONS (CFFO)


(Fiscal) (in $ millions)
Reported Restated Increase or
(decrease)
09/30/2000 7,158.4 6,876.4 282
09/30/2001 6,665.3 6,429.9 235.4
09/30/2002 5,474.4 5,198.0 276.4
Cumulative 793.8
increase or
(decrease)

SOURCE: United States SEC (see appendicesfor detailed data)

Based on the table, from year 1998-2002, the cumulative overstated operating income
was about one billion dollars. This is the result of violating the federal securities law by
overstating its reported financial results, smoothing those reported earnings, hiding vast
amounts of senior compensation and a large number of related party transactions from
investors. Just to achieve their desired goal, the company utilized a number of improper
practices conceived, guided, or encouraged by the individuals who managed the company in
leadership of CEO Kozlowski. During the time, at least $500 million of Tyco’s inflated
operating income resulted from improper accounting practices related to some of its
acquisitions. In addition, they used a variety of reserve accounts to enhance and smooth its
reported financial results and to meet earnings projections. Another area of Tyco’s
misconduct involved a scheme designed to overstate operating income and cash flow from
operation in connection with transactions between Tyco’s ADT Security Services, Inc.
(“ADT”) subsidiary and the security alarm dealers from whom it purchased residential and
commercial security alarm monitoring contracts. As a result, given in the data above, the cash
flow from operations has an aggregated overstated amount of $793.8 million from fiscal year
ended 2000-2002.

Additionally, they also failed to disclose million dollars of executive compensation,


executive indebtedness, and related party transactions of its former Chief Executive Officer
L. Dennis Kozlowski, former Chief Financial Officer Mark H. Swartz, and former Chief
Corporate Counsel Mark A. Belnick. Tyco also incorrectly accounted for certain executive
bonuses it paid in its fiscal year 2000 and 2001 by excluding the costs associated with these
bonuses from operating expenses. Finally, Tyco violated the Foreign Corrupt Practices Act
(“FCPA”) when its employees or agents made illicit payments or provided entertainment to
foreign officials for the purpose of obtaining or retaining business Tyco.

As a result of these practices, Tyco made false and misleading statements or


omissions during this time period in its filings with the Commission and in Tyco's statements
to investors and analysts. Overall due to their acts, Tyco violated the violated the provisions
of the federal securities laws prohibiting fraud; prohibiting false and misleading proxy
statements; requiring maintenance of accurate books, records, and accounts and sufficient
systems of internal accounting controls by public companies; requiring that accurate periodic
reports be filed with the Commission by public companies; and prohibiting payments to
foreign officials for the purpose of obtaining or retaining business.

3.5 Individuals Involved

Dennis Kozlowski, a former Tyco CEO, joined the


company in 1975, working under JosephGaziano,
the earlier CEO of Tyco. Kozlowski began his career
as an accountant and rose through the ranks of Tyco's
Grinnell Fire Protection Systems company and
became its president. Gaziano enjoyed an extravagant
lifestyle, because of Tyco cash, which included
business aircraft, extravagant vacations, and luxury
club memberships. Kozlowski, fascinated by the
glamour, tried to imitate it. In 1982, however, John F.
Fort III took over as CEO, and Fort's managerial style
and spending habits were vastly different from Gaziano's. Kozlowski had to rapidly adjust to
the company's new goal of aggressively improving shareholder profitability while reining
down his extravagant spending habits. Soon after becoming President of Grinnell Fire
Protection Systems, Kozlowski was named President and Chief Financial Officer of Tyco.
Fort, concerned about Kozlowski's purchase pattern of speed and violence, petitioned the
Board of Directors to curtail Kozlowski's operations, especially following Tyco's $360
million acquisition of Wormald International, a global fire defense corporation. The Board of
Directors, however, sided with Kozlowski, and Fort resigned as CEO in 1992. Kozlowski
took over as CEO and resumed his previous lifestyle,
which included owning various extremely expensive
homes, continuous reveling, and an excessively
demanding managerial style.
Mark Swartz was Tyco International's former Chief Financial Officer. Around 1995, he was
named Chief Financial Officer of Tyco International. He started working under the
supervision of his leader Dennis Kozlowski who has been the Chief Executive Officer at the
company. Within the company, they worked closely together and became good friends in
their private life.

3.6 Root Cause of Fraud


1. Individual Greed- Due to the lavish and expensive lifestyle of the top-rank
executives, it gives them drive to commit fraud and manipulate subordinates to deceive its
stakeholders and the general public.

2. Wrong Corporate Culture and Poor Corporate Governance- The humiliation


of not targeting the expected profit led financial executive and its subordinates to be puppets
of the CEO and CFO for financial incentives. The two were expected to deliver strong leader
stewardship but completely did the exact opposite.

3.7 Summary in Detection of Scandal


★ In 1999 Tyco's financial statements were investigated by the Securities and Exchange
Commission (SEC) when the business restated its earnings, creating suspicions.
★ January 2002 - suspicions regarding Tyco's bookkeeping and accounting began to
arise. The value of the stock has dropped by 19%.
★ January 29, 2002 - Kozlowski explains that the $20 million paid to Frank Walsh was
a finder’s fee for the acquisition of CIT.
★ January 30, 2002 - Kozlowski and Mark Swartz (Tyco's CFO) declare that they
would each buy 500,000 Tyco shares on the open market. That step has been made to
ensure the stock value of Tyco.
★ April 25, 2002 - Kozlowski explains why the company's profits were 96 cents per
share for the quarter ended March 31, 2002, and explains how exceptional charges
affect profitability.
★ June 3, 2002 - Kozlowski steps down as CEO of Tyco for personal reasons. John Fort
has been appointed as the temporary CEO.
★ June 4, 2002 - Kozlowski was charged with massive sales tax evasion by the
Manhattan district attorney, initiating a new investigation into Tyco's wrongdoing.
★ June 10, 2002 - Belnick, who was appointed as Tyco's chief legal officer in 1998, is
fired.
★ June 17, 2002 - Tyco files a lawsuit against Belnick for violation of fiduciary
responsibility and fraud, through the law firm of Boies, Schiller & Flexner. Belnick
argues that he performed with integrity. as Tyco's chief legal officer.
★ August 1, 2002 - CFO Swartz resigns from Tyco.
★ September 12, 2002 - The SEC files civil charges against Kozlowski, Swartz, and
Belnick for failure to disclose information about the multibillion-dollar transaction to
stockholders.
★ September 19, 2002
- Kozlowski has been freed on $100,000 bail. The bail is set at $100 million, with $10
million in assets from Kozlowski's ex-wife as bail.

- Swartz has been freed on a $50,000 bail. The bail is set at $50 million, with 500,000
shares of Swartz's own Tyco stock as bail.

- Belnick was released after paying a $1 million bail.

3.8 Results of the Scandal

  Tyco's financials were investigated by the Securities and Exchange Commission


(SEC) in 1999 when the firm restated its revenues, raising suspicions. Kozlowski was
accused of substantial sales tax fraud by the Manhattan district attorney in 2002, prompting a
new inquiry into Tyco's illicit operations. Tyco, for example, had forgiven a $19 million
interest-free loan to Kozlowski and had even paid his income taxes on it.

The SEC filed a lawsuit in 2006, charging that Tyco violated federal securities
regulations by participating in a lot of unethical practices. As to the lawsuit, Tyco falsified its
financials by overstating the outcomes through misrepresenting its operating revenue and
increasing it by about $500 million besides misusing acquisition accounting standards. Tyco
also deceived investors by concealing significant party transactions as well as excessive
salary and incentives for top executives.

The company as a whole has suffered extremely. Stock prices had crashed, and those
who were involved had encountered difficulties which included shareholders, employees, and
all stockholders, although not resulted to bankruptcy of Tyco. This impacted investors who
relied on the CEO and CFO's assurances that "they did not sell their shares." When the crime
was discovered, both offenders sold $100 million worth of shares since they knew their
unethical acts would lead their stock prices to go down, and therefore didn't want to invest in
it. When the stock price dropped, all investors suffered losses as a result of the information
provided by the offenders, which led investors to make unwise decisions. The offenders'
actions were not merely "ethically irresponsible," but also "socially irresponsible."As of
2007, Tyco wassplit into three separate companies, consisting of Covidien Ltd. (formerly
Tyco Healthcare), TEConnectivity Ltd. (electronics), and Tyco International Ltd. (formerly
Tyco Fire and Securityand engineering products) (nytimes.com). Each is now a separate
publicly-traded entity.

3.9 Criminal Offenses and Penalties


A. Kozlowski and Swartz are charged with:

● Corruption
● 1 count of fourth degree conspiracy
● 12 counts Grand larceny
● 8 counts of first-degree falsifying business records

A. Mark Belnick is charged with:

● Falsifying business reports


● Failing to disclose loans made to himself (for the purchase of his Manhattan
apartment and Utah home), to investors and Tyco's compensation committee
● Paid $100,000 in civil charges for his role in the situation

Tyco Scandal Players and Fines

The losses they caused Tyco are estimated at $600 million.

★ Dennis Kozlowski (CEO) and Mark Swartz (CFO)


- Imprisonment of 25 years and 8 1/3 years, respectively.
- Together, restitution to Tyco of approximately $134 million.
- Criminal fines of $70 million and $35 million, respectively.
IV. Recommendations andConclusion

4.1Recommendations

The main concern in this case of Tyco was a conflict of interest. To avoid the
possibility of having the conflict of interest once again, the company's new management
elected a new board of directors and appointed an independent individual as chairman rather
than a CEO. The company's measures may prove to be effective.In addition, the company
should develop an ethical corporate culture. To accomplish so, the company should establish
a code of conduct. According to the International Labour Organization, a code of conduct is a
corporate declaration that explains ethical principles and applications that employees should
follow. A code of conduct might encourage ethical and moral behaviour among corporate
personnel. Employees might avoid convicting in a conflict of interest if they followed the
code of conduct. Employees should be given the guidelines to the code of conduct so that
they may better understand it.

Aside from the code of conduct, the company should also provide seminars and
training for workers to educate them how to deal with issues related to conflict of interest,
such as the issues that have been mentioned, which include stealing money funds, accounting
fraud, abuse of power, and so on. During training and seminars, employees should be
encouraged to practice whistleblowing when it comes to directly protecting your organization
from wrongdoings like fraud and misbehaviour. While encouraging whistleblowing, the
company should also put in place safeguards for whistle-blowers to protect them from being
boycotted by their co-workers. The protections provided may also allow the whistle-blower
to report the wrongdoing of others without intimidation. Keeping the information of the
whistle blower confidential is an example of the protection that the corporation may provide.
The mere possibility of fraud might be minimized if there was a culture of whistleblowing.
Leadership has a significant impact on company culture. Top management should
lead with integrity so that their subordinates may look up to them as a positive role model. It
is critical for leaders to establish the proper leadership in order to inspire ethical behavior
among employees. A responsible and honest leader can aid in the promotion and transmission
of his or her ethical and moral values to subordinates. As a result, while hiring a new
manager or promoting an existing manager, the firm should examine and stress not just the
person's skills, but also his or her personality and ethical viewpoint.

4.2Conclusion

Every company will face such ethical difficulties at some point, and the ethical
questions will be raised. The majority of Tyco International's ethical concerns revolved
around conflicts of interest. Stealing millions of funds, abuse of power, and accounting fraud
were all concerns related to conflict of interest Apart from the conflictof interestviewpoint, all
of these situations were immoral in other ways.

The company has suffered largely as a result of top management's inappropriate use
of power to engage in unethical behaviour.Due to a lack of a strong ethical environment and
absence of ethical leadership, Tyco suffered significant losses during the 2002 scandal. If a
firm seeks to survive and grow in today's business world, it needs to be more than just aware
of ethical standards, it needs to be actively implementing them, combined with rigorous
internal controls to prevent unethical or unlawful behaviour. A company's corporate
governance structure must be protected against unethical practices. In the absence of such
safeguards, Tyco executives committed theft, dishonesty, and accounting fraud.
Consequently, these measures not only affected the company's employees and stockholders,
but it also had an uneven effect on people who owned Tyco shares in their employer-
sponsored retirement account. This effect has caused a delay in retirement in causing it in
certain cases.

As a conclusion, the company's top management should fulfil its responsibilities by


educating its employees the importance of acting ethically in both professional and personal
interactions, as well as to act ethically in both, and correctly managing their organizations by
following the code of conduct and effectively controlled in all division.A Good leadership,
ethical conduct, and a stronger relationship between a business and its stakeholders will all
lead to the company's success in maximizing profits. Because a company which has a high
and good ethical conduct will last longer than a company without ethical conduct.

V. References

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http://archive.boston.com/business/gallery/business_criminals?pg=3. Accessed 28
Sept. 2021.
 Hadid, Hashem. Tyco International – Corporate Scandal. Accessed 28 Sept. 2021.
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https://www.bostonglobe.com/business/2015/03/02/dennis-kozlowski-from-infamy-
obscurity/fdemfnhgN7eaN2Q88liLmO/story.html.
 Kemmerer, Christian H., and Tara J. Shawver. “Tyco: A Top-Down Approach to
Ethical Failure.” SSRN Electronic Journal, 2007, doi:10.2139/ssrn.1010558.
 L. Dennis Kozlowski, Mark H. Swartz, and Mark A. Belnick: Lit. Rel. No. 21129 /
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 Ltd, All Answers. “Unethical or Legal Issues in Tyco International.” LawTeacher, 26
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fbclid=IwAR15V8tsNTmUrfJE3kxZpk1E58uqbvMCVe1st_HhcKFGYfEX_JBgRu2
7Log.
 Thanos, Lori M. Tyco International Ltd. Case Study: The Implications of Unethical
Behavior. Accessed 28 Sept. 2021.
 ---. Tyco International – Corporate Scandal. Accessed 28 Sept. 2021.
 “Tyco - Securities Fraud - Investor Fraud - Impact Law.” ImpactLaw,
http://impactlaw.com/criminal-law/white-collar/securities-fraud/lawsuits/tyco.
Accessed 28 Sept. 2021.
 Z.A., Rasha. Corruption: Unethical Practices of Corporate Executives- A Case Study
of Tyco International. Accessed 28 Sept. 2021.
 “Index.” Soft Corruption. Rutgers University Press, 2019. 267–298. Web. 28 Sept.

2021.
 Kennedy, Kristin A. “An Analysis of Fraud: Causes, Prevention, and Notable Cases.”

n. pag. Print.

 York, US District Court: Southern District of New. “SEC Complaint: Tyco

International Ltd.” n. pag. Print.

 “Form 8-k.” N.p., n.d. Web. 29 Sept. 2021.

VII. Appendices

6.1 Table 1.0COMPARATIVE FINANCIAL REPORT OF OPERATING INCOME


(REPORTED VS RESTATED, FR. YR 1998-2002)
This table shows the impact of the aforementioned adjustments on operating income (loss)
and operating margins ($ in millions):
Fiscal Year Ended September 30,
2002 2001 2000 1999 1998
Operating (loss) income, as previously reported $ (1,579.0) $6,186.8 $5,474.4 $ 2,190.8 $ 1,948.1
Adjustments:
Phase 2 Adjustments 36.1 13.0 (26.4) (29.8) 8.1
Capitalized and Deferred Costs (43.2) (34.6) (39.2) (59.0) 2.8
Reconciliation items (20.0) (47.7) (1.9) (8.0) (22.5)
Adjustments to Accrual Balances (19.6) - 1.8 - -
Asset Reserve Adjustments 4.6 (1.5) (8.1) - -
Other Accounting Adjustments (14.1) (35.4) (23.2) (4.4) (2.2)
Customer Contract Amortization Method (107.3) (74.5) (54.9) (34.0) (13.1)
ADT Dealer Reimbursements 186.9 (172.1) (93.7) (64.7) (37.2)
Tyco Network Transaction (21.4) (16.2) - - -
Healthcare Divestiture Transaction 137.9 (154.3) - - -
Insurance and Compensation Accrual Adjustments (13.3) (47.1) (30.8) (5.5) -

Increase (decrease) in operating (loss) income 126.6 (570.4) (276.4) (205.4) (64.1)
Operating (loss) income, as restated $ (1,452.4) $5,616.4 $5,198.0 $ 1,985.4 $ 1,884.0

Operating Margins:
As previously reported (4.4) % 18.2% 18.9% 9.7% 10.2%
As restated (4.1) 16.5 18.0 8.8 9.9
TABLE 2.0 COMPARATIVE STATEMENT OF CASHFLOW
(REPORTED VS RESTATED, 2000-2002)
This table shows the amounts ($ in million) that are reported and restated from year 2000-
2002.

Fiscal 2002 Fiscal 2001 Fiscal 2000


           
Amounts Amounts Amounts
As As As
Previously Previously Previously
Restated Restated Restated
Reported Reported Reported
Statements of Cash Flows:
Income from continuing Operations $(3,070.4) $(2,838.2) $ 4,401.5 $ 3,894.9 $ 4,519.9 $4,318.5
Net cash provided by operating activities 7,158.40 6,876.4 6,665.30 6,429.90 5,275.0 5,156.40

Purchase of property, plant and equipment (1,708.7) (1,678.8) (1,797.5) (1,773.4) (1,703.8) (1,695.9)
Construction in progress - Tyco Global Network (1,146.0) (1,146.0) (2,247.7) (2,247.7) (111.1) (111.1)
Acquisition of businesses, net of cash acquired (1,683.8) (1,683.8) (9,962.0) (9,962.0) (3,746.4) (3,746.4)
Acquisition of customer accounts (ADT dealer
(1,401.0) (1,139.3) (994.6) (798.1) (500.10 (390.7)
program) (1)
Other Investing activities 6,298.1 6,286.5 3,363.2 3,378.9 (876.1) (874.8)
Net cash provided by (used in) investing
activities 358.6 638.6 (11,638.6) (11,402.3) (6,937.5) (6,818.9)
Net cash (used in) provided in financing
activities (1,836.8) (1,836.8) 6,295.7 6,295.7 1,165.3 1,165.3
Net increase (decrease) in cash and cash
equivalents 5,680.2 5,678.2) 1,322.4 1,323.3 (497.2) (497.2)
Tyco capitals cash and cash equivalents
- -
transferred to discontinued operations (1,272.6) (1,272.6) (808.0) (808.0)
Cash and Cash equivalents at beginning of
period 1,779.2 1,780.1 1,264.8 1,264.8 1,762.0 1,762.0
Cash and Cash equivalents at end of period $ 6,186.8 $ 6,185.7 $ 1,779.2 $ 1,780.1 $ 1,264.8 $1,264.8

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