Tyco

1
Tyco
International, Ltd.
ACCT 647-601 Lindsay Fredericks Angela
Guerra Aurelie Magnuson Paul VanderLinden
2
Tyco History

• Tyco was founded in 1960 as a research
  laboratory.
• Focus on commercial high-tech materials,
  science,
• and energy conversion products.
• The Company went public in September 1964.
• Today, Tyco employs 260,000 people worldwide.
• Core businesses are leaders in their markets.

http//www.tyco.com
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Tyco History, cont.

• Tyco has five major business segments
• Tyco Electronics
• Tyco Healthcare
• Tyco Plastics Adhesives
• Tyco Fire Security
• Tyco Engineered Products Services

http//www.tyco.com
4
Tyco misled investors by

• Pushing the limits of GAAP by employing
  aggressive accounting
• practices.
• Urged management to employ accounting practices
• that suited the companys interests.
• Operating expenses were lumped in with
  acquisition-related charges.
• Management made acquisition deals look better
  than they actually were.

http//www.cfo.com
5
Tyco misled investors by

• Attempting to post high earnings growth by
  implementing
• aggressive acquisition accounting.
• Used a purchase accounting liabilities account
  to keep acquisition-related expenses off the
  income statement.
• Accrued for purchase accounting liabilities at
  the time of the acquisition.
• When expenses were incurred, the company credited
  cash and debited the purchase accounting
  liabilities account.

http//www.cfo.com
6
Tyco misled investors by

• Spending billions of dollars on numerous
  undisclosed
• acquisitions.
• Tyco spent approximately 8 billion over 3 years
  on undisclosed acquisitions.
• In February 2002, Tyco acknowledged that 4.19
  billion was spent on undisclosed acquisitions in
  2001.
• This amounted to 37 of the total cash spent on
  acquisitions for the year.
• Details on smaller acquisitions were not
  disclosed in the financial statements.

http//www.cfo.com
7
Executive fraud

• L. Dennis Kozlowski, CEO, and Mark Swartz, CFO
• Received over 170 million in undisclosed loans
  from Tyco.
• Sold seven and a half million shares of Tyco
  stock for 430 million without telling investors.
  

http//www.cfo.com
8
Tyco Exposed

• On Jan. 16, 2002, it was announced that that L.
  Dennis Kozlowski, CEO, would have to be removed
  after learning that he had approved a 20 million
  "finder's fee" to another board member.
• The board asked for the money to be returned.
• Disclosure of the unauthorized payment was the
  beginning of Tyco's public troubles.

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Tyco Exposed, cont

• Kozlowskis luxurious lifestyles first attracted
  attention when he was charged with evading New
  York State sales tax on art purchases.
• A closer look revealed huge illegal expenditures,
  payments and loans.
• On Sept. 12, 2002, an SEC formally charged
  Kozlowski, Swartz, and Belnick.

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Financial Statement Effects

• Tyco International had over-reported its 2002
  results by nearly 400 million.
• Its financial reports for the past five years
  were inflated as well.
• While no major fraud was uncovered in the
  internal
• investigation, creative accounting
  practices were.
• Blame for the negative findings was put on the
  shoulders of Tycos former management.

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Financial Statement Effects

• The purchase price used to record the
  Mallinckrodt acquisition
• was understated as a result of incorrectly
  computing the value
• of equity securities.
• Purchase price was understated as a result of
  incorrectly computing the value of employee stock
  options.
• This caused the understatement of goodwill and
  equity.
• Overstated pre-tax earnings were a result of the
  related
• goodwill amortization that would have been
  recognized in
• 2001.

12
Stock Price over 5 years
13
Penalties

• No penalties have been assessed against Tyco.
• The trial has been underway since October, and
  probably will continue through January.

14
Penalties

• Kozlowskis and Swartzs assets were frozen.
• Kozlowski and Swartz had to secure 100 million
  and 50 million bail bonds, respectively.
  Belnick was freed on a 1 million bond.

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Penalties

• Kozlowski and Swartz are charged with
• Corruption
• Conspiracy
• Grand larceny
• Falsifying records
• The losses they caused Tyco are estimated at 600
  million.
• Belnick is charged with
• Falsifying business reports
• Failing to disclose loans made to himself to
  investors and
• Tyco's compensation committee

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Penalties

• The SEC seeks a final judgment ordering Kozlowski
  and Swartz to disgorge all of their ill-gotten
  gains.
• These include
• All compensation received subsequent to their
  fraudulent acts
• All loans not properly repaid to Tyco
• All losses avoided from sales of Tyco stock
• Civil money penalties
• Kozlowski and Swartz could face up to 30 years
  in prison if
• convicted.

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Questions?