My script
Good day everyone
I am amanda issabelle Amulong from group two and we are here to tackle one of the biggest cases of
abusive authority among corporate executives for the past 20 years.
To start, let us first have a brief introduction on who is Tyco corporation.
Founded in the 1960’s by Arthur J. Rosenburg, Tyco International expanded quickly in the 70’s and 80’s
with their aggressive strategy of acquiring other companies inclined in their line of business. They
became diversified pivoting from being an investment holding company, moving to the highly profitable
security systems industry.
Tyco international is (they are) a premier security solutions company that once joined with a 40 billion
dollars of annual revenue at the peak in the early 2000s joining the s and p 500 index. A market-
capitalization-weighted index of 500 leading publicly traded companies in the U.S. They operated in over
100 different countries and was a large producer of electrical components. They designed and produced
underwater telecommunications systems, fire protection, plastics and adhesives, electronic security
services and specialty valves.
From 1996 through the middle of 2002, Tyco under Kozlowski the former Tyco CEO acquired more than
700 companies pursuant to its plan to become a global, diversified manufacturing and service
conglomerate. During the same time period, Tyco pursued the same strategy of aggressive and continual
earnings growth. As a result of its massive acquisition campaign, Tyco came to have approximately 1,000
individual business units, which were organized by business line within various operating divisions,
including Fire & Security Services, Electronics, Healthcare, Plastics and Adhesives, and Engineered
Products and Services
But this was over shadowed by the fraud of former executives of the company, former CEO and
Chairman Dennis Kozlowski and former corporate Chief Financial Officer Mark Swartz. Were they reaped
a whooping $600 million through a racketeering scheme involving stock fraud, unauthorized bonuses
and falsified expense accounts?
Many say too much greed is the source of this fraudulent activities by Kozlovski and Swarts, a classic
case of greed and looting but on a massive scale involving hundreds of millions of dollars.
To fully understand, let continue to tackle about Tyco’s scandal in which will be narrated by
Emmanuel genesis Reyes and jasmine jane mercado
Under Dennis Kozlowski, the Tyco CEO, the company continued its strategy of aggressive acquisitions,
acquiring thousands of companies gaining its international presence.
As part of the relocation of the company, many employees had to relocate from New Hampshire to New
York, in which Tyco initiated a program where by employees can have a loan with low interest or no
interest at all from the company to help employees to cover their expenses incurred during the
relocation. One of the requirements of the relocation program was the employee’s certification that he
or she was indeed moving from New Hampshire to New York or in some cases to Boca Raton.
There is also a Tyco program that allows high up executives to get low interest or interest free loans
from the company, called the “key employee corporate loan program” also known as “kelp”. It is meant
for high executives who have significant compensation in a form of stock options.
Kelp was established to encourage employees to own Tyco shares by offering dedicated loans to pay the
taxes due when shares granted under Tyco’s restricted share ownership plan became vested. There was
no way to pay the taxes except to sell some of the shares in exchanges for cash, and the loan program
permitted the officers to pledge their shares in exchange for cash that was then used to pay the income
tax that was due on this employee benefit. The loan then is paid back when the executives get enough
liquidity in the future.
The kelp program was explicitly described by SEC, to be utilized only for that specific program
the loan proceeds may be used for the payment of federal income taxes due upon the vesting of the
company’s common stock from time to time under the 1983 restricted stock ownership plans for key
employees, and to refinance other existing outstanding loans for such purpose.
Kozlowski and Swartz took advantage of this loan, given a hundred of millions of dollars that of course
did not go to its stated purpose.
The former CEO and chairman Dennis Kozlovski used the loan from the kelp to fund his extravagant life
style, including a $2 million toga birthday party for Kozlowski’s wife on a Mediterranean island and an
$18 million Manhattan apartment with a $6,000 shower curtain.
According to SEC documents, the former CEO borrowed more than $270 million from the kelp, but used
only about $29 million to cover intended uses for the loans. He then used the remaining $242 million of
supposed kelp loans for personal expenses including yachts, estate jewelry, luxury apartments and
vacations estates, personal business ventures and investments all unrelated to Tyco.
He also uses the said loan to buy fine arts that he then also used to evade tax. One of these instances
involved Kozlowski’s purchase of artwork, for which empty crates were sent to Tyco’s New Hampshire
address in order to avoid taxes in New York. It can be argued that these tax evasion instances were
intended to avoid raising red flags that authorities could use against Kozlowski’s other illicit activities at
the company.
The CFO, Swartz also spent about $75 million of supposed kelp loan on his personal expenses. He used
some of the money to personal investments, real estates and trust.
Both executives lied to the company and company investors by concealing this inappropriate spending.
Dennis Kozlovski also exploits the relocation loan by buying a $18 million luxury water front compound
in Boca Raton. But although this could be considered as a fair use of the benefits, the residence only
accounts for a third of the loans that he took out. Purchasing other luxury properties in New Hampshire,
Nantucket and Connecticut in which cannot be claimed as relocation residence. He also even purchases
a prestigious $7 million apartment in NY for his ex-wife whom he had been separated for many years.
Same as Kozlovski, Swartz also bought an extravagant $17 million boca Raton water front mansion,
spending also about six and a half million dollars on a New York upper east side apartment. With the
remaining $9 million dollars that he took, he bought things like a yacht and personal investments in
things like real estate.
Belnick, Tyco’s chief legal officer also stated that he was entitled to the loans because of such writings
from Mr. Kozlovski. It is despite the fact that he was a partner in a New York city law firm and would be
working in New York for Tyco. Receiving a relocation fee for a difference of 25 miles between his home
and Tyco’s New York offices, and despite the fact that he had never lived in New Hampshire. Belnick
borrowed $4 million used in purchasing and renovating an apartment in New York. Later, he borrowed
another $10 million to construct a home in park city, Utah, because he was moving his family there and
would divide his time between the two locations, and the extensive international; travel is job requires.
Mark Belnick did not disclose $14 million dollars of loans and that eventually had caused him some
criminal charges. To conclude this, it is to be known that these loans were purposely being kept off from
the company’s financial statements which caused it to be excluded from being a part of the company’s
assets and it had fought against the common principle of completeness in the internal control system
When it can’t be even worse, the two also took steps to turn those loans into gifts to themselves.
The two colluded to wipe $37.5 million off the loans collectively owned to Tyco. That were forgiven and
thus added up to a $37.5 payment from Tyco to Kozlowski and Swartz. These forgiven loans were
disclosed to any financial reports or announcements. But the $37.5 million is only a small fraction of
what they borrowed from the company.
So, Kozlovski initiated a program called “relocation loan forgiveness” for multiple employees.
In this program, employees who received relocation had to sign an agreement stating that they would
not disclose loan forgiveness to anyone besides their financial, legal or tax advisors.
This program allows Kozlovski to have another $33 million in loan forgiven, and Swartz having $16.5
million forgiven. In which this was added up to a $50 million payment from Tyco to the CEO and CFO.
To cover the loan forgiveness program, which was a significant expense to the company Kozlovski and
Swarts buries the cost with the public offering of the company.
Up to 40 loans were later “forgiven” as part of Tyco’s loan-forgiveness program. Something to keep in
mind is that many didn’t know they were doing something wrong.
This program was concealed by another corporate action specifically the gain on divestiture by the
company, the sale of an asset by a company as a way to manage its portfolio of assets. Adding to the
other individual schemes of the two top executives of the company.
One of Kozlovski and Swartz schemes is making Tyco buy their assets three times of the original price.
They also use the company’s asset including jets and airplanes incurring large cost to the company
without ever paying for anything.
Money had also been paid out purchasing their silence about Kozlowski’s actions in the company
through the company programs. This led to further corruption of the top branch of leaders in Tyco
making Kozlowski bolder as time passed.
And lastly, Money had also been paid out purchasing their silence about Kozlowski’s actions in the
company through the company programs. In summary, Tyco including executives Dennis Kozlovski and
Mark Swartz were under the SEC complaints for:
urging managers to apply accounting principles improperly to reduce the value of acquired
assets and increase the value of acquired liabilities. The managers were told to encourage
improper adjustments to a target entity's books and records, thereby reducing the value of the
assets and overstating the liabilities prior to their acquisition by Tyco. Alternatively, the
managers were urged to record improper values for acquired assets and liabilities on Tyco's
books. Personnel were also encouraged to establish purchase accounting reserves for costs that,
pursuant to accounting principles, should not be charged to such reserves. In some instances,
personnel were told to charge Tyco's then current expenses against purchase accounting
reserves. At times, incorrect guidance on acquisition accounting was also provided to managers
in other Tyco divisions, including the Electronics division and the Healthcare division. This
guidance was followed in a number of instances, resulting in an overstatement of Tyco's
earnings reported to the Commission and the investing public
Tyco also used excess reserves to make period-end adjustments to enhance and smooth its
publicly reported results and to meet earnings forecasts. Various Tyco business units moved
amounts to reserve accounts in reporting periods in which it appeared that the units would not
need the amounts to meet their EBIT targets. If a business unit's earnings fell short of its EBIT
target in a subsequent period, the unit would make up the shortfall by reversing reserves,
including those reserves where past "excess" amounts had been stored, to its income
statement.
From September 1996 through early 2002, Tyco failed to disclose in its annual Reports on Form
10-K and in its proxy statements certain executive indebtedness, executive compensation, and
related party transactions of former executives Kozlowski, Swartz, and Belnick. The executive
indebtedness and executive compensation that Tyco failed to disclose involved, in large part,
loans made under Tyco's Key Employee Loan Program ("KELP") and its relocation loan programs.
Tyco also failed to disclose millions of dollars that Kozlowski and Swartz received under Tyco7s
relocation loan programs between 1996 and 2002. And failed also to disclose certain executive
indebtedness of Belnick.
On three separate occasions in 2000 and 2001, Tyco incorrectly accounted for certain executive
bonuses it had paid by classifying these bonuses in its financial statements so that they did not
negatively impact operating income. Jn July 2000, Tyco successfully completed an initial public
offering ("PO") of part of its previously wholly owned subsidiary, TyCom Ltd., which served as
the holding company for Tyco7s undersea fiber optic cable communication business. The TyCom
PO generated a one-time gain of approximately $1.76 billion on Tyco7s books. In September
2000, Kozlowski granted bonuses to fifty-one Tyco executives, managers, and employees
totaling in the aggregate approximately $95.9 million. Of the $95.9 million in total bonuses paid,
Tyco classified approximately $44.6 million as an expense of the TyCom PO, in spite of the fact
that the bonuses were not direct and incremental costs of the IPO. Accordingly, that $44.6
million in bonus expense was recorded in Tyco's financial statements in such a manner that it
had no effect on Tyco's operating income. 45. In October 2000, Tyco sold its ADT Automotive
business for approximately $1 billion, with a net gain on the sale of approximately $400 million.
In November 2000, Kozlowski used the ADT Automotive divestiture as a vehicle for the payment
of $56 million in bonuses to a small group of Tyco executives and managers. Rather than
recording the $56 million in bonuses as an expense in its operating earnings, Tyco offset the
entire expense against the gain realized on the sale of the ADT Automotive business.
Consequently, these bonuses did not negatively impact Tyco's operating income.
From 1999 through 2002, on at least one occasion, Tyco employees or retained agents made use
of the mails or of a means or instrumentality. of interstate commerce in furtherance of the
payment of money or things of value to foreign officials to obtain or retain business for Tyco.
False entries were made to Tyco's books and records in an attempt to conceal these illicit
payments. Moreover, the misconduct was made possible by Tyco's failure to implement
procedures sufficient to prevent and detect FCPA misconduct. In 1998, Tyco acquired
Multiservice Engenharia Ltda., a Brazilian engineering company, and renamed it Earth Tech
Brasil Ltda. ("Earth Tech Brazil"). Tyco acquired Earth Tech Brazil notwithstanding that its due
diligence for the acquisition revealed that illicit payments to government officials were common
in Brazil and were portrayed as necessary in the industries in which Earth Tech Brazil conducted
business. From 1999 through 2002, employees at Earth Tech Brazil repeatedly paid money to
various Brazilian officials for the purpose of obtaining business, primarily in the construction and
operation of municipal water and wastewater treatment systems. The payments to Brazilian
officials were so widespread during this time that approximately sixty percent of Earth Tech
Brazil's total contracts involved some form of payment to a government official. At times, the
payments were made by lobbyists that Earth Tech Brazil retained with full knowledge that all or
a portion of the money that Earth Tech Brazil paid to the lobbyists would be given to various
Brazilian officials for the purpose of obtaining work for Earth Tech Brazil. Executives located at
Earth Tech's corporate offices in Long Beach, California received e-mail communications,
participated in telephone calls, and attended meetings where illicit payments to Brazilian
officials for the purpose of obtaining or retaining business for Earth Tech Brazil were discussed.
False invoices from companies that were owned by various Earth Tech Brazil. employees were
typically submitted to obtain the funds for the illicit payments and to conceal these payments on
Earth Tech Brazil's books and records. In some instances, lobbyists submitted inflated invoices to
Earth Tech Brazil to obtain the funds needed to make the payments. 52. From 1999 through
2002, on at least one additional occasion, false entries were made to Tyco's books and records
in an attempt to conceal illicit payments and entertainment that were provided to foreign
officials by Tyco employees to obtain or retain business for Tyco. This misconduct was made
possible by Tyco's failure to implement procedures sufficient to prevent and detect FCPA
misconduct, despite knowledge and awareness within the company that corruption and illicit
payments were common practices in the foreign country where the unlawful payments were
made.
From September 1996 through the fiscal quarter ended December 31,2002, Tyco filed with the
Commission false and misleading annual and quarterly reports, proxy statements, and
registration statements. Those reports and registration statements included, directly or by
incorporation, financial statements that materially misrepresented Tyco's financial results,
including significantly overstating its operating income. The annual reports and proxy
statements also misrepresented or omitted to disclose certain executive compensation,
executive indebtedness, and transactions between Tyco and its executives.
It is indeed an act of greed that leads to this fraudulent activity. To know about the outcomes of this
unfortunate event, let’s call on Adela Cruz to continue our report.
SEC has filed a complaint alleging the Tyco violated the law of federal securities by engaging in several
improper practices. The complaint stated that Tyco distorted its financials by overstating the results
through misusing acquisition accounting standards by misrepresenting its operating income and
boosting it by around $500 million. Not only that, but Tyco, also, misled investors by hiding considerable
party transactions and excessive compensations and bonuses to senior executives
In addition, the commission has ruled out that Tyco misused the accounting regulations by aiming in
spreading fraudulent information to investors using the contract purchases method. It discovered that a
huge duplicitous amount has been pumped to the CFFO and other $567 million were deceitfully
generated to operating income.
By hiding the sale of the stocks, it enriched the two and allowed them to avoid losses when the scandal
was uncovered and the company’s stock drops. In which during the scandal, Tyco stock lost half of its
value. With about $70 billion of shareholders value in total.
Kozlovski and Swartz were eventually ended up serving some years in prison charged with corruption,
conspiracy, grand larceny and falsifying records. Belnick was also put into prison with charges of
falsifying business reports and failing to disclose loans made to himself, to investors and Tyco’s
compensation committee.
But unfortunately, they bailed their way out and continued living as an ordinary middle class working
man.
May I call on Cyllde Delleva as we move forward to the ethical issues present in the Tyco 2002 scandal.
The unethical leadership at Tyco.
Dennis Kozlowski was at the center of the unethical activities in the business organization. He was a
scary as other individuals call him with a philosophy of “money is the only way to keep score”. As the
CEO, he committed unethical practices that led to the legal battles and related financial problems of
Tyco. Kozlowski, the main actor in this case, was the primary recipient of the money stolen from the
company. He used his position as CEO to persuade other top-ranking Tyco officers and lower ranking
employees to get involved and turn a blind eye to his questionable and illegal activities. This case
illustrates that the involvement of Kozlowski and other employees was a major factor that contributed
to the Tyco scandal. Although factors like organizational culture affected the events in this case,
leadership was a critical factor that facilitated the occurrence of the corporate scandal.
Unethical Business Practice of Subordinates.
The complications in Tyco’s case involved people other than Kozlowski. Kozlowski recruited the support
of CFO Swartz, another high-ranking officer in the organization. Members of Tyco’s board of directors
were also involved. For example, a board member kept silent about the purchase of a mansion for
Kozlowski and his wife. In exchange, the board member received financial benefits, either directly or
indirectly. In addition, Kozlowski convinced some lower ranking employees to keep their silence, also in
exchange for financial benefits. In short it is a case of bribery that involves offering or accepting
something of value in a situation where the person who accepts the bribe is expected to perform a
service which goes beyond his or her normal job description.
Questionable Auditing Practice.
The auditing firm PricewaterhouseCoopers (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.
To continue our discussion to the internal control, may I once again call Amanda Issabelle Amulong to
present.
In connection to the unethical practices of Tyco. Tyco’s Internal control & Governance failure are as
follows
poor documentation and disclosure of data’s to authorized personnel’s,
Inadequate Policies and Procedures to prevent the misconduct of senior professionals
Inadequate procedures for proper corporate authorization
Inadequate approval procedures and documentation
A lack of oversight by senior management at the corporate level (BOD)
Aggressive accounting and Improper auditing by auditors.
SO HOW DID ALL THESE THINGS HAPPEN.
Because of the weakness in internal control. The situation began when Dennis Kozlowski became the
most important person in the company. As the director of Tyco International, when he took an
advantage of his title on a superior level.
1. First, He had used his power to hire or recruit individuals of his choice. He possessed the job
authorization by making sure that he would recruit and authorize the chosen individuals all by
himself. This could have caused the company to have incompetent employees since they were
not qualified for the work.
Segregation of duties should be implemented as a part of Tyco International’s norm. Dennis
Kozlowski could be the only one authorizing the job, whereas the job of recruiting could be
given to the company’s human resource, and another individual may delegate the positions for
the accepted to be either executives or managers based on the appropriate requirements.
2. Employees have free-flow access to the company’s important files like financial statements
without any supervision.
Kozlowski believe that being a successful company meant to have high profits. So, individuals under him
were pressured to do all of its cost to make it happen. One way they targeted is the financial statement.
They manipulated it, since they have a free-flow access to the company’s important files without any
supervision.
It could be suggested for the company to hire a finance supervisor to hold the financial statements and
prevent from exposing them unnecessarily to other employees. This is to ensure that the financial
statements would not be damaged from employees that did not get authorizations to use them.
3. There was a poor and indirect communication between the presidents and the board of
directors
As the CEO, he would collect all sorts of information from four divisions of Tyco International and due to
this, he would be receiving all information beforehand, take note that he was the only one receiving it.
He knew everything from the division presidents, but he would only choose what he wanted to share to
the Board. In this case he can manipulate information and make it seems to other board of directors
that all matters in the company is well. This is clear that the board of directors would have no idea of
Tyco International’s actual condition, since there were possibilities that Dennis Kozlowski could be
hiding many things from them.
4. Workers did not report to the authorities the fraudulent actions of Dennis Kozlowski.
Because in most cases, all those workers who realized what they are doing is fraudulent will be fired.
And All workers who reached Kozlowski expectation is rewarded. By this, Tyco International technically
lost competent workers who were particular with problems that occurred in the company. Furthermore,
since there were no reports made to the authorities, Dennis Kozlowski would have full access in abusing
his power
The company was also committing its biggest mistake by not taking action against the CEO who was
involved in illegal activities. It’s because to survive in the long run, the company needed to have a
positive and clean image in the market, leaders needed to have such an influential image, which was the
factor that was harming the company’s reputation.
5. The assets of the company were not under a proper independent person’s custody.
earnings of the company were guarded by the Board of Directors with Dennis Kozlowski included in the
list. Due to this, there was a poor implementation of presentations and disclosures and most
importantly, valuations and allocations of resources inside Tyco’s control system. This could lead to
having the company’s assets being unnecessarily misused or worst-case scenario, being considered as
the employees’ own property –
They are the only who have access so they can do whatever they want it to be. Because of this the
earnings could be used to purchase private luxurious lifestyles
6. there were accounting information that had not been disclosed and verified, which is against the
principle that all information should have their own internal verifications and disclosures
Because of these weaknesses, Tyco’s executives were able to steal $600 million dollars from Tyco
International through their unapproved bonuses, loan and extravagant company spending. They
covered their illegal actions by keeping away accounting books from shareholders and board of
members so that their criminal activities would not be detected by any party.
To conclude this unethical business practices could have been prevented if Tyco’s board of directors
fulfilled its roles and responsibilities. The directors should have examined the appropriateness of these
programs and any loopholes that could be used for illegal transactions. The board of directors also had
the opportunity to assess Kozlowski’s decisions and strategic plans to identify possible red flags.
In this regard, the ineffectiveness of the board of directors in properly evaluating Tyco’s programs was a
factor that contributed to the corporate scandal involving Kozlowski, Swartz, and other employees.
We may also suggest that business professionals must evaluate the role of management education in
the areas of ethical and functional standards and incorporate the development of responsible
leadership. Recommending that organizations should establish and enforce codes of ethics, including
management training of those codes, regular performance measurement against those codes through
standardized metrics, and full support and by example from senior management.
And that concludes all,
Thank you for listening.
Recommendations
The recommendations for Tyco international are given below:
To solve the problems in the company; the chairman and the team should make placards to
make a flow of meeting agenda, which should be given to the members prior to the meeting so
that the stakeholders can track the company’s activities and the stakeholders should be
prepared enough to analyze the company’s proposal and along with that, they must prepare to
evaluate and communicate the company’s statistics.
The company should make all the bylaws clear to its management and employees. Bylaws
should be written in detail, so that they would know the consequences of what they have been
doing. It will help the company in communicating the consequences to the employees and the
employees would always think twice before getting involved in illegal activities. Bylaw should
include the following sections:
Power capacity of every member and the process of meeting.
Members’ voting rights.
Penalties against rule-breaking.
Other legal amendments.
The board of directors should make a strict and strong mechanism to look after the business
activities, especially the CEO should be asked for accountability and must be kept an eye on.His
leadership style and behavior should be evaluated, which will help the company to get the track
records of what the CEO is doing and how he is guiding his employees.
The board members should ask for the information regarding what the company is doing and
what is going on in the company. On-time information gathering will help the auditors to know
more about the company and its activities.
