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Laluon, Prince Ricky Lenard

Malijan, Joshua B.

Obias, Gianuel G.

Case Study: Tyco international fraud


Tyco Background

Tyco International has operations in over 100 countries and claims to be the world's largest
maker and servicer of electrical and electronic components; the largest designer and maker of
undersea telecommunications systems; the larger maker of fire protection systems and electronic
security services; the largest maker of specialty valves; and a major player in the disposable
medical products, plastics. Edward Breen, who replaced kozlowski removed nine members of
Tyco’s international board, and adhesives markets. Since 1986, Tyco has claimed over 40 major
acquisitions as well as many minor acquisitions.

How the Fraud Happened

According to the Tyco Fraud Information Center, an internal investigation concluded that there
were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did
happen? Tyco's former CEO Dennis Kozlowski, former CFO Mark Swartz, and former General
Counsel Mark Belnick were accused of giving themselves interest-free or very low 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, Swartz, and Belnick 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
Kozlowski's wife in Italy are just a few examples of the misuse 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. Hush
money was also paid to those the company feared would "rat out" Kozlowski.

Essentially, they concealed their illegal actions by keeping them out of the accounting books and
away from the eyes of shareholders and board members.

How it Was Discovered

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 "spring-
loading," 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
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, all three (Kozlowski, Swartz, and Belnick) were gone and charges were filed
against them for failure to disclose information on their multimillion dollar loans to shareholders.

The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in
the form of undisclosed loans and compensations.

Where Are They Now?

Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120
million without the approval of Tyco's directors, abusing an employee loan program, and
misrepresenting the company's financial condition to investors to boost the stock price, while
selling $575 million in stock. Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a
$100,000 civil penalty for his role. Since replacing its Board Members and several executives,
Tyco International has remained strong.

The difference in the Tyco case and some of the others is that it is more related to greed than
accounting fraud.
Kozlowski and swartz were charged with :

Corruption

Conspiracy

Grand larceny

Falsifying records.

The losses they caused tyco are estimated as $ 600 million.

Belnick is charged with:

Falsifying business records.

Failing to disclose loans to made himself ( for the purchase of his manhattan apartment and Utah
home ) to investors and tyco compensation committee.

September 19, 2002-kozlowski is freed on $100 million bail.the bail is paid with a $1oo million
bond and secured with $10 million in asset from kozlowski’s ex wife.

Swartz is freed on $50 million bail. The bail is paid with a $50 million and secured with 500,00
of swartz personal tyco stock.

Belnick is freed on a $1 million bond.

Tyco continues operation and has replaced many members from its board of directors.edward
breen the former Motorola executive has replaced kozlowski; david Fitzpatrick, who worked in
number of blue firms has replaced swartz and William lytton the former international paper
executive has replaced belnick.

What are the ethical and legal issues in this case?

The ethical and legal issues at Tyco International range from discrimination, accounting fraud,
grand larceny. The issues involved cohesion on the part of the CEO, and the members of his
team. In addition, they placed great emphasis on placing their own values ahead of what was
good for the organization.

What role did Tyco's corporate culture play in the scandal? What roles did the board of directors,
CEO, CFO and legal counsel play?
Tyco's corporate culture was driven by the CEO, Dennis Kozlowski who admired the
extravagant and lavish lifestyle lavish of the former CEO, Joseph Gaziano. He took an assertive
approach to acquisitions and mergers, which helped Tyco, maintain a 14 year growth within the
business units. He viewed himself as the organizations, therefore, conducted business as such.

The Boards of Directors are responsible for protecting Tyco's shareholders interest. In some
cases, some of the board members were not aware of the fraud, and other unethical deals that
were going on behind the scenes. The board members that were aware, did not bring the issues to
the other members of the board, therefore, they were just as guilty of unethical behaviors as the
CEO and his direct reports. The reason this could have transpired is probably due to the majority
of board members being on the board >10 years, and the relationships that had been established
over time.

The CEO, CFO and legal counsel, due to the nature of their positions, were not honest and
transparent with the stakeholders concerning the issues relating to the accounting fraud and
conflicts of interest. They all engaged in an enterprise of corruption and collusion.

Now we will evaluate the planning function of the Tyco Company and analyze the impact that
legal issues, ethics, and corporate social responsibilities have on management planning. The year
2000 was a year marked by scandal over the accounting practices of some of the biggest
corporations in the world, including Tyco International Incorporated. Tyco’s top executives were
indicted and convicted of fraud charges stemming from both improper accounting practices as
well as improper personal use of company funds. The planning strategy of these executives
seems to have been more focused on personal gain than on the best interests of the company and
its shareholders. They ignored their responsibilities to the laws governing corporate management
and to their investors and employees. Dennis Kozlowski, the chief executive officer, alone
plundered the company of over 400 million dollars. Using company funds, he threw a toga party
for his wife’s birthday that cost two million dollars. He bought millions of dollars worth of art to
decorate his home. He spent six thousand dollars of company money on a shower curtain and 15
thousand dollars on an umbrella stand shaped like a poodle. Unlike most of the companies
targeted by those investigations, Tyco survived the scandals and is still in business today because
it changed the way that it operates. Three of the factors that influence management planning
today are their ability to obtain materials and components for manufacturing, the rate of attrition
for their home security products and services and the ongoing litigation and investigations.

The Tyco guide to ethical conduct

The Tyco Guide to Ethical Conduct- has been developed to advise employees on what the
correct practices and procedures are, when working for Tyco, the guide also outlines examples of
unethical behaviour and ways in which it can be reported.
Handling an unethical situation

If you discover an ethically questionable situation at work, don't jump up at the next department
meeting and say "I work for unethical morons," . Instead, say something such as, "there are some
issues here that we should be concerned about, and we probably ought to fix these problems
before they get more serious. Our current approach to meeting goals may not be a sustainable
economic model." Thoughtful input -- especially when grounded in the corporate histories we
now have – works.

And you're better off quitting than getting sucked into a corporate culture of groupthink that is
likely to make negative headlines at some point. If you feel subtly or blatantly squeezed to cross
the line, it's probably time to update your resume. But if you're asked to do something illegal,
type that resignation letter..

Don't worry about explaining your resignation to potential employers,. Get out now, because
workers who go down with the ship often are tainted by the organization's implosion; then tell
the truth, "that you had the wisdom to walk away from a bad situation."

"People tend to see this decision only in terms of what they are giving up by leaving -- salary and
benefits. But even if you're the sole provider for a family, you're still better off losing a job than
getting caught up in falsifying financial information, for instance,".

.
Bottom Line:

Tyco International chairman and CEO Dennis Kozlowski reportedly hauled home more
than $150 million in unauthorized bonuses, prosecutors said at his trial
• Jeff Dachis co-founded Razorfish as the dotcom phenomenon surged, then fell victim to
his own hype; he was washed out of the Internet consulting firm within just seven years
of start-up.
• Ethical icons exist, such as Southwest Airlines' Herb Kelleher.
• If confronted with an ethical lapse at work, point it out as an issue that needs to be
addressed because of the business implications.

If you find that the culture at your company supports unethical practices, resign and avoid the
taint that comes with the inevitable exposure.

Theory applied in tyco fraud case :

Ethical egoism falls under the consequentialistic theory that claims that moral conduct is
determined solely by a cost-benefit analysis of an action’s consequences. The normative claim of
ethical egoism is that one should act so as to maximize good and minimize bad for oneself. The
foundational claim for this theory is that humans are poorly self-interested and there are no moral
demands beyond self-interest, i.e., no obligations to anyone other than ‘myself’. Therefore, under
this theory, it is understood that humans should act selfishly if they wish to live healthy and
meaningful lives. we can see in this case study too as the CEO think of his own personal interest
rather than of the organization. Decisions made are not for the good of the entire industry but for
the good of the individual or organizational interest.

In conclusion, I must say that I see many faults in this theory and therefore I do not agree with
it. In regards to ethical egoism an individual believes that whatever serves his own interests is
morally right. I do not see this as being an efficient way of looking at ethical issues since
fulfilling only what’s right for oneself many different problems can come up. Another reason I
do not agree.

Solutions

As quality professionals, our ability to acquire, utilize, and maintain reliable and valid databases
is at risk and will continue to be at risk at least in the near future. Whether out-and-out fraudulent
data are provided to us, or whether we are the victims of data-shaving or data-shading, every
quality professional is likely to experience this trend at some point in his or her career. In a larger
sense, the ethical behavior of a company is certainly part of the “Quality-with-a-big ‘Q’” that we
seek to enhance every day. Creating an ethical culture and enforcing ethical behavior is the
function of upper management, not just the quality department, but there are some things within
our control that we can do to improve the situation. We believe that the implications of this
reality suggest that every quality professional should:
• Establish internal systems for the periodic sampling, review, and assessment of critical
databases for reliability and validity

• Ensure that among the guidelines provided to external suppliers, ethical expectations associated
with the provision be clearly specified and that the consequences of failure to comply with these
basic standards be swift, severe, and unambiguous

• Encourage upper and middle-level management to participate in meaningful education on the


process by which ethical decision making in business and industry can be accomplished

Telling employees to “do the right thing” just isn’t effective. Ethical dilemmas are not clear
choices between breaking the law and being law-abiding; they are at times complex moral mazes
with no easy answers. It is not illegal to place the health of the company and investors’ money
into risky investments for short-term profits, but a case can be made that it is unethical. The good
news is that these moral mazes can be better navigated if employees are trained in ethical
decision-making processes and principles.

The time to avoid the results of unethical behavior is before it occurs, not after. As quality
professionals, we learned a long time ago that prevention is superior to inspection. In no area
might this be more important than business ethics.

CONCLUSION

. "In the case of Tyco International, we have seen what corporate greed can eventually lead to.
After this scandal as well other scandals such as the Enron and WorldCom scandals, many
citizens lost trust in corporations. In order to reestablish trust and prevent future executives from
acting dishonest, the Sarbanes-Oxley Act was passed, and more internal control are now being
implemented. In the future, if an executive is confident enough to try and bypass the regulations
and steal money from an organization, he will face even more serious charges. Corporate
executives such as CEO's of major corporations are among the most elite members of American
society. They are extremely well paid, they have excellent benefits, and they are in the position
to bring wealth to their families. Given the amount of money they are already receiving, many
would find it ridiculous that a corporate executive would even consider stealing money. It is
important to understand, however, that people with so much pride and ambition often have no
limits, and to them, nothing is ever enough. Their greed often gets in the way of their honesty
and loyalty to the people around them, resulting in scandals like the one described and
demonstrating the need for ethics in business and more acts of government intervention .

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