TYCO: THE PRECURSOR,
THE SCANDAL,
THE REBIRTH

By
Anya Davies, Student

MGMT/103
Facilitator: Dr. Charles A. von Urff
Week 2 assignment Individual Written Paper
Due September 31, 2014
Submitted September 31, 2014

Introduction Every year or so we hear about big corporate accounting scandals, most of which originate in the United States. “Corporate malfeasance has earned a place among the defining themes of the last decade-and-a-half, helping give birth to the present global recession and the Occupy Wall Street Movement”. Based on the amount of money stolen and on how unethical and illegal its ground was, Tyco Scandal, happened in 2002, is definitely the most notorious (The 10 Worst Corporate Accounting Scandals).
The Precursor Arthur J. Rosenberg founded Tyco Incorporated in 1960, in Waltham, Massachusetts.
In 1982 Tyco was divided into three business segments: fire protection, electronics and packaging. In the 1990s Tyco was reorganized and comprised “electrical and electronic components, health-care and specialty products, fire and security services, and flow control. By 2000, Tyco Inc. had acquired more than three major companies such as ADT, the CIT Group, and Raychem” (Unethical Issues).
Leo Dennis Kozlowski became the CEO in 1992, after being the company’s CFO. He “became the personification of the acquisition mania of the 1990s, and assumed the qualities necessary for the task—brutishness, aggressiveness, and a commitment to the accumulation of his own personal wealth, above all else. He was one of the best-paid CEO’s of the decade” (Kay, 2002). Kozlowski composed Tyco’s “corporate governance system” by picking his own crony for the board of directors. During Kozlowski’s leadership, the company grew its profits over $30 billion (Unethical Issues).

The Scandal
In 1999, around “a stock split, rumors began to spread about Tyco’s …irregular financial accounts”, … but Tyco’s leaders denied it. The Tyco’s scandal had happened in 2002, when the board of directors started an investigation about their members’ unethical behavior. “Kozlowski and his few “friends” were resigned and have been dragged to the court. Kozlowski and Swartz, the Chief Finance Officer (CFO) of Tyco Inc. were alleged for stealing $170 million from the company and fraudulently selling an additional $430 million in stock options”. Kozlowski and a few others from “board of directors also have been accused in embezzling of Tyco fund for their private use [(purchasing luxury homes, yachts and fine arts)] and were cited for conflict of interest issues. This scandal has caused the shares value decreased drastically and made the workers breathless” (Unethical Issues).
“The deed of embezzling company fund had breached the principle of ends. According to the principle of ends, we must never exploit others to achieve our own objective. In this case, Kozlowski had exploited the company by using company fund to fulfill his own desire of having a lavish lifestyle” (Unethical Issues). Technically, the process looked like this: “Tyco paid high prices for acquired companies, and rather than writing this cost off as an expense, which would have to be reported to shareholders as a reduction in earnings, the company created a massive amount of goodwill (about $35 billion) on its balance sheet. Since the middle of 2000, Tyco accumulated over $20 billion of goodwill on companies that it acquired for $24 billion. That is, the actual hard assets of these companies were less than $4 billion” (Kay, 2002).
Tyco International was so successful in its deeds because almost all its leaders were involved in the crime. The Company “failed to give true financial picture for several years. Dennis Kozlowski, Mark Swartz and Mark A. Belnick were those Tyco’s executives who committed fraud by charged with falsifying business record to conceal a great amount of loan without approval. Besides, it had been found out that Tyco engaged in “financial gimmicky” to deliberate and manipulating its earnings. Jerry Boggess, the president of Tyco Fire and Security is the one who involved in bookkeeping fraud that affected the earning per share in Tyco in this case. Besides, Dennis Kozlowski also indicted on tax evasion for avoiding just over $1 million in New York State and local sales tax”. In addition, Scalzo (Tyco’s former auditor) who audited Tyco's financials from the years 1997 until 2001, was found that he failed to conduct sufficient steps in audit procedures which related to certain executive benefits, executive compensation, and related party transactions” (Unethical Issues).
“Another ethical issue under conflict of interest in the scandal of Tyco International is bribery…. In this scandal, two major bribery cases were occurred. The first case is Frank E. Walsh Jr., the director of Tyco International, had received $20 million for helping the arrangement of the acquisition of CIT Group without the knowledge of the rest of the board of director. Next, the second case is Stephen W. Foss, the member of Tyco’s board of director received $751 101 for supplying a Cessna Citation aircraft and pilot services” and ignoring by this the bidding system (Unethical Issues).
“Corporate culture, set by almost all the directors, played important role in Tyco fund embezzling. “Corporate culture is an energy field that determines how people think, act, and view the world around them. Culture is automatically created out of the combined thoughts, energies, and attitudes of the people in the group. In another word, culture will shape people’s attitude that are come from the same group. Tyco International did not emphasize an ethical corporate culture during the empire of Kozlowski. Gaining personal interest than on the interests of the company had became the corporate culture of Tyco International” (Unethical Issues).
The Rebirth
After the resignation of Kozlowski, Tyco was saved by the new management led by Edward Breen (an independent person and an “antithesis of Big City, Bright Lights Kozlowski”), and a completely new board of directors (Laing, J. R., 2003). One “of his early decisions was to move out of Tyco's fancy midtown Manhattan executive suite, replete with opulent furnishings, thick oriental rugs and two kitchens in which Tyco chefs prepared cordon bleu meals for Kozlowski and his henchmen. Breen speaks of the office with as much wonder and bemusement as disgust. He has since moved Tyco's headquarters to a nondescript office building in southern New Jersey where his office view is of a parking lot rather than Central Park. He knew that such gestures were important to the troops” (Laing, J. R., 2003).
Because the conflict of interest was the major issue in this case, the company’s new management started with cultivating an ethical corporate culture. Code of conduct can “promote ethical and moral deeds among the employees in the company” (Unethical Issues).
After these and many more changes Tyco should have a bright future.

References
The 10 Worst Corporate Accounting Scandals of All Time (n.d.). In www.accounting- degree.org. Retrieved August 28, 2014, from http://www.accounting-degree.org/scandals/
Unethical Issues or Legal Issues in Tyco International (n.d.). In www.lawteacher.net. Retrieved
August 28, 2014, from http://www.lawteacher.net/company-law/essays//unethical-issues-or-legal-issues-in-tyco-international-company-law-essay.php
Kay, J. (2002, June 18). Tyco: US Conglomerate Falls Amid Revelations of Greed and
Corruption. In www.wsws.org. Retrieved August 31, 2014, from http://www.wsws.org/en/articles/2002/06/tyco-j18.html
Laing, J. R. (2003, December 15). The New Tyco. In online.barrons.com. Retrieved September
1, 2014, from http://online.barrons.com/news/articles/SB10712813036449900?tesla=y