The infamous Tyco Scam of 2002

Tyco Company

Tyco International Plc (hereinafter referred as Tyco) is a company incorporated in the year of 1950 in the Republic of Ireland. The company dealt with manufacturing and security system and had its operational headquarters at Princeton, New Jersey and the United States. The company was engaged in serving innumerable industries. The company has a prevalent business in major industries like pharmaceutical, chemical, petroleum, petrochemical, pulp etc.[1] The company was mainly headquartered in West Windsor, New Jersey. The company witnessed huge growth during the years of 1990s and 2000s where the revenues saw a hike of nearly 10 times. Gaziano was the man behind the incorporation of the Tyco industries and he led the business for a long time. But in the year of 1982, he died suddenly, and the company was handed over to John F. Fort and in the same time, the company saw a rise in its revenue from 34 million dollars to 500 million dollars. Under his leadership, the company was divided into three divisions i.e. fire protection and plumbing division, the electronics divisions and the packaging division. He also initiated a programme named compensation programme according to which employees of the company are bestowed with a particular amount proportionate to the profits earned by the company. The company changed its structure of division in three categories to four categories. After the company acquired a 132-year-old company named Mueller Company, the company emerged as a very strong player in the market and the divisions of fire protection and plumbing was further divided to create varied divisions for fire protection and plumbing.

Company’s Performance During the Time of Recession

Akin to most of the companies worldwide, the Tyco Company also experienced a slowdown during the time of recession. The company saw a continuous depletion in its earnings and despite the steps taken by the company officials to curb the situation, nothing seemed to work. It went to such a situation where the company’s financial books posted a profit of a mere one million dollar in the year 1993. During all the chaos in the company relating to financial crisis and increasing cost, the company’s management and control were further shifted to L. Dennis Kozlowiski.[2] With the new leadership came new strategies to revive the company from the situation. Kozlowiski although started with the same strategies of decreasing the expenses but he, later on, focussed on rigorous and unplanned acquisitions which did not prove to be fruitful to the company’s situation. The strategy seemed to work for a little while when the company’s books of accounts depicted revenue of 12 billion dollars and again emerged as a giant company. During his tenure, the company acquired more than 110 companies by spending 28 billion dollars for the same. Subsequently, the company also changed its name to “Tyco International Company.”

The major acquisition during his tenure came in the year 1996 when the company acquired Kendall International and the company’s division relating to packaging was changed to disposal and speciality products. The company continued to acquire major companies and the acquisition of AMP which was the world’s leading company in the field of manufacturing electric and electronic fibre optic and wireless connections, in the year 1999. All these acquisitions of the company aided in the revival of the company and double the revenues of the company, but it was short-lived.

The fall of the company under Kozlowiski

The continuous and reckless acquisitions by the company always raised questions on company’s conduct and following this an enquiry was instituted by the Securities Exchange Board (hereinafter referred as ‘SEB’) in 1999 for scrutinizing the actions of the company but nothing was found. The forthcoming year of 2001 became the most acquisitive year for the company with major acquisitions paving way for the development of the company in different spheres. This year was very fruitful for the company as its books of accounts depicted a net income of the amount of 3.97 billion dollars. Behind the company’s fall in 2002, one of the major reasons was the increasing scepticism of regulatory bodies after continuous corporate scandals that have been witnessed one after another. Further, the investor also grew sceptic in regards to investing their money in corporates which have a complex system of accounting and where the perplexed accounting can lead to a major scandal. Considering all this, the concerns and inquiry about any kind of fraud begin to rekindle and this time the concerns were alarming and ever-increasing. The scepticism in the industry and towards the company kept growing which led to losing the shareholders and diminishing value of the stock of the company.

Change of Plans

To curb this problem, the company’s top officials and mainly Kozlowiski panned out a plan according to which the company was to be divided into four companies and they decided to sell off the plastic department. Though the Wall Street acted precisely in their favour, but the plans of the company were again changed. Now according to the new plan, the company retained the plastic department and only CIT group was to be sold off through an Initial Public Offering (hereinafter referred as ‘IPO’). These change in plans, the indecisiveness of the top officials and the increasing scepticism of the stakeholders led to the falling of shares to 20 dollars per share, which accounted as a 66 per cent decrease in the share value of the company. Along with all this, the company faced another issue when Kozlowiski resigned due to the initiation of a criminal probe against him. Just after his resignation, he was indicted for evasion of one million dollars in sales tax. After the completion of the enquiry, Kozlowiski was accused of fraud, corruption and stealing more than 170 billion dollars from the company. After one year the case went to Court for trial where it lasted for six months. Though the judges declared that the company has not committed any fraud but there were deliberations from the jury which led to a retrial.

Discovery of Flaws in the Accounting System

Meanwhile, the company was in the hands of Breen which worked for making the company more accountable, transparent and amending the accounting systems of the company. While doing that he discovered that the company’s accounting system had certain severe flaws leading to a misstatement in books of accounts of almost 2 billion dollars. Severe internal accounting reviews for several months led to such discovery of a flaw in the accounting system but at the same time, it was urged that there were no outright issues raising concerns for the commission of fraud by the company.

In continuation of the proceedings, it was reiterated that the top officials of the company have siphoned off the funds of the company majorly for the funding of the lavish lifestyle of the company’s top officials. The major siphoning of took place from the department of electrical, healthcare and safety equipment.

The Ethical Issues

The major Tyco scandal brought limelight on a very serious issue relating to the conduct of business i.e. “Ethics that are to be followed” while conducting the transaction relating to business. In the present case of Tyco scam, it has been pointed out that the top officials not only included the lower officials in the scam but also included outsiders to earn profits by unfair and unethical means. The lesson which is supposed to be learnt from the said scandal in that the company shall ensure that the business is conducted with ethical practices at all levels in an organisation. The ethical issues involved in the present case are as follows:

1. Unethical Leadership
2. The unethical business practice of subordinates
3. Unethical auditing practice on Tyco’s business[3]

Unethical Leadership

Pondering upon the first issue relating to the scandal in hand, it shall be noted that Kozlowiski who was at the highest position in the company, guided the company and emerged as a leader in the eyes of outsiders. He has also played an active role in conducting the scam as he has only persuaded the lower-level employees and other third parties to act unethically and in his favour. So, it can be easily comprehended from the given observation that a leader shall always be ethical while conducting the business so that he can ensure the same conduct from his fellow employees.

The unethical business practice of subordinates

Coming to the second issue, it has been found that the company’s several employees were recruited by Kozlowiski to aid in his endeavours relating to the scam. Also, the top officials of the company were kept silent about the same by bestowing them financial benefits. He also managed to silent the board members about his wrongdoings by using the same technique and strategies. So, this shall also be considered that while recruiting employees special care shall be taken by the employers to ensure that their conduct is ethical and in favour of the company’s business.

Unethical auditing practice on Tyco’s business

At last, delving into the third issue relating to the scandal is about auditing practices carried upon by the corporates to conduct such fraud. In the present case, the auditing firm responsible for overlooking the accounts of the firm has also played a major role in the commission of this scandal. The firm completely and miserably failed at identifying the fraud committed by the top officials while scrutinizing the company’s accounts. The non-identification led to the continuance of such practices in the company and resulted in such a huge scam. So, the auditing firms shall also comply with their auditing standards and shall deliver their services in such manner that such frauds are not left under covers.

Impact on the Company

The effects of the company by the whole scandal was humongous and incomparable as it was hard to revive the company to its original position and required efficient endeavours from the top officials to stimulate and normalize the condition of the company. The effects on the company are as follows:

• The foremost and major challenge faced by the company was the loss that was incurred because of the whole episode. It has been seen that the company during the whole issue suffered a loss of 9.41 billion dollars. It also affected the goodwill of the company which further resulted in the company hitting its lowest value of the stocks. The investors also grew sceptical which led to enquiries in the company’s accounting and financial systems.
• To revive the company, a new strategy including a wider restructuring programme came into play which involved the shedding of more than 50 low margin non-core businesses. This further led to the termination of 7,200 employees from its payroll and cessation of 219 facilities worldwide.
• In December of 2003, the company seized its listing of the shares in London due to low trading volume, retaining the listing on the New York Exchange.
• The firm’s credit ratings went on to poor state and though the company revived and increased the value of the shares, but the company still was not fully recovered. The company also faced a huge challenge in recovering its image as 2000 cases were pending against the company by its shareholders.
• Further, the company also kept facing several enquiries along with accounting reviews for several years. It also led to the company facing enquiries in the accounting systems by the SEC.

Conclusion

The article gives an overview of every aspect of the scandal involved in Tyco and the problems faced by the people involved in such companies. It also covers the major ethical issues involved in the scandal as they are needed to be pondered upon and kept in mind while doing business. The Article discusses the brief history of the company along with its performance during the time of recession. It majorly discusses the fraud committed by the top officials and the prevention of it in while conducting business and in future endeavours.

[1]Tyco International Ltd. – Company Profile, Information, Business Description, History, Background Information on Tyco International Ltd.,https://www.referenceforbusiness.com/history2/97/Tyco-International-Ltd.html

[2]Ibid

[3]Jonathan Romero, Tyco Corporate Scandal of 2002 (Ethics Case Analysis),http://panmore.com/tyco-corporate-scandal-2002-case-analysis

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