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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 "springloading," the pre-acquisition earnings of an acquired company are underreported, giving the
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. Many of them were offset as bonuses without open approval . Tyco fraud Tyco manufacture a wide variety of products. for the most part these loans were taken with low to no interest. Kozlowski resigned from Tyco "for personal reasons" and was replaced by John Fort. and Belnick to restore the funds that they took from Tyco in the form of undisclosed loans and compensations. Both are serving 8 1/3-to-25-year prison sentences. As investigation continues it uncovered that Dennis kozlowski . The difference in the Tyco case and some of the others is that it is more related to greed than accounting fraud. Since replacing its Board Members and several executives. and Belnick) were gone and charges were filed against them for failure to disclose information on their multimillion dollar loans to shareholders. who replaced kozlowski removed nine members of Tyco¶s international board. as.merged company the appearance of an earnings boost afterwards. exchange and securities commission began an investigation at Tyco¶s top executives. By September of 2002. all three (Kozlowski. kozlowski and Swartz also sold seven and a half million shares of Tyco stock for $430 million without telling investors. Mark Swartz Tyco¶s former CFO and Mark Belnick the company¶s chief legal officer had taken over $170 million in loans from Tyco without receiving appropriate approval from Tyco¶s compensation committee and notifying shareholders. In June 2002. Jr. Formal charges were made by the SEC September 12. In January 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. 2002. Inquiry into the accuracy of the of the company¶s book began in January.the conglomerate operates in over a 240. 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. Swartz. Tyco International has remained strong. The investigation ended with the SEC deciding to take no action. That payment was later explained as a finder's fee for the Tyco acquisition of CIT.000 civil penalty for his role. from electronic components to healthcare products . Tyco former CEO . During 2002. Tyco has been able to regain much in lost ground under its new leadership because the acts of securities fraud committed by former Tyco executives were concealed and for the most part disguised. and misrepresenting the company's financial condition to investors to boost the stock price. a precautionary act however Edward Breen. the majority of Tyco¶s employee committed no acts of fraud knowingly . abusing an employee loan program. Belnick paid a $100.000 people. Swartz. . The SEC asked Kozlowski. while selling $575 million in stock.
June10. Schiller and Flexner. January 30.This move is made as an assurance of the value of Tyco stock. April 25. begins the process of suing belnick for breach of fidiuacary duty and fraud.Question rise about the accuracy of tyco¶s bookkeeping and accounting. Stock value drops 19 percent. June 17. August 1.belnick who was hired on tyci 1998 as the chief legal officer is fired. 2002. 2002. Kozlowski and swartz were charged with : Corruption Conspiracy Grand larceny .Tyco investigation The following time line chronicles the progress of investigation and indictments against Dennis kozlowski .kozlowski explain that the $ 20 million paid to frank wolsh was a finders fee for the acquisition of CIT.CFO swartz resign from Tyco September 12. John fort is the name of temporary CEO. 2002. 2002. January 29.Tyco through the law firm of boies.kozlowski explains 96 percent loss share for the quarter ending on march 31.00 Tyco shares on open market .kozlowski resigns as CEO of tyco for personal reasons. 2002.kozlowski announces that he and mark swartz( tyco¶s then CFO) will each purchase 500. 2002.2002 and outlines unusual cost that affected earnings.kozlowski is attempted for attempted tax evasion. 2002. The SEC asked kozlowski . June 4. swartz and belnick by the SEC for the failure to disclose of shareholders information on the multi million dollar loans they borrowed from tyco. belnick maintains that he acted with integrity as Tyco¶s chief legal officer. January 2002. swartz and belnick to restore funds they took from tyco¶s various forms of undisclosed loans and compensation. 2002. June 3.civil charges are filed against kozlowski. 2002. mark Swartz and mark belnick.
00 of swartz personal tyco stock. For instance. he is credited with a brilliant series of mergers and acquisitions that hugely boosted profits. who worked in number of blue firms has replaced swartz and William lytton the former international paper executive has replaced belnick. The bail is paid with a $50 million and secured with 500.the bail is paid with a $1oo million bond and secured with $10 million in asset from kozlowski¶s ex wife. either. Kozlowski poured his heart and soul into building the Princeton.7 billion. 2002-kozlowski is freed on $100 million bail. to $3. September 19. Belnick is charged with: Falsifying business records. david Fitzpatrick. Swartz is freed on $50 million bail.edward breen the former Motorola executive has replaced kozlowski. before extraordinary charges. Failing to disclose loans to made himself ( for the purchase of his manhattan apartment and Utah home ) to investors and tyco compensation committee. A gifted chief who threw extravagant company parties. Belnick is freed on a $1 million bond.some $400 million -. throwing his wife a million-dollar 40th birthday party. Tyco sales leapt 28 percent and earnings. For 27 years. He didn't hide his enormous wealth. When charisma turns crooked Tyco International chairman and CEO Dennis Kozlowski is a prime example. Kozlowski reportedly began surreptitiously siphoning company money -. The losses they caused tyco are estimated as $ 600 million. in fiscal 2000. While his Tyco annual compensation climbed to $100 million.Falsifying records. indulging in a $6. New Jersey industrial conglomerate into a massive powerhouse. . Florida. increased 46 percent.into his pockets. Tyco continues operation and has replaced many members from its board of directors.000 shower curtain for their Manhattan home and buying acres of prime real estate in pricey Boca Raton.
She also filed a lien against their Boca Raton mansion. among other crimes.'" A downward journey of many steps Kozlowski was able to rationalize his cupidity because there was probably never a single moment when he morphed from a corporate shepherd to a ravenous wolf. After the first prosecution ended in a mistrial. filed for divorce in July. 2007 interview from Mid-State. He was sentenced to an 8-to-25-year sentence in 2005. the cheating grew and the lies multiplied. and the members of his team. Karen Kozlowski. blames jealous jurors for his prison term. The issues involved cohesion on the part of the CEO. anxious to ride the boss's coattails. who insists he is innocent of wrongdoing. I think gigantic fraud is the way to go." . after his resignation from the company. Instead. cheating a wee bit here.Government investigators caught up to him in 2002. grand larceny. CFO and legal counsel play? .' It's not a fast crash and burn. 'All that money? He must have done something wrong. and as the years went by. "This is a gradual. In addition. he inched along ethically. grabbing $150 million in unauthorized bonuses. accounting fraud. and is serving his time at Mid-State Correctional Facility in Marcy. hesitate to challenge him or her. for alimony and half their marital assets. falling back on a useful white lie there. The journey into dishonesty is easier if. They proved that Kozlowski had gone wildly astray. what are the ethical and legal issues in this case? The ethical and legal issues at Tyco International range from discrimination. Like the multitude of stockholders who have made civil-court claims against him. During a March. What role did Tyco's corporate culture play in the scandal? What roles did the board of directors. His wife. A CEO doesn't wake up one day and say. step-by-step process. they placed great emphasis on placing their own values ahead of what was good for the organization. Kozlowski told 60 Minutes' Morley Safer that he was "a guy sitting in a courtroom making $100 million a year [and] I think a juror sitting there would just have to say. Kozlowski. 2006. selling Tyco stock after artificially driving up share prices and in general. CEO. now 60. a second jury convicted him of almost two dozen counts of grand larceny. New York. she is suing Kozlowski. looting the company. leaders surround themselves with brash young hustlers who lack business seasoning and. 'Gee. like Kozlowski.
did not bring the issues to the other members of the board. He bought millions of dollars worth of art to decorate his home.has been developed to advise employees on what the correct practices and procedures are. alone plundered the company of over 400 million dollars. Using company funds. . conducted business as such. Unlike most of the companies targeted by those investigations. 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. Now we will evaluate the planning function of the Tyco Company and analyze the impact that legal issues. They ignored their responsibilities to the laws governing corporate management and to their investors and employees. The CEO. and corporate social responsibilities have on management planning. He spent six thousand dollars of company money on a shower curtain and 15 thousand dollars on an umbrella stand shaped like a poodle. and other unethical deals that were going on behind the scenes. therefore. They all engaged in an enterprise of corruption and collusion. the guide also outlines examples of unethical behaviour and ways in which it can be reported. Joseph Gaziano. The reason this could have transpired is probably due to the majority of board members being on the board >10 years. He viewed himself as the organizations. The Boards of Directors are responsible for protecting Tyco's shareholders interest. he threw a toga party for his wife¶s birthday that cost two million dollars. The year 2000 was a year marked by scandal over the accounting practices of some of the biggest corporations in the world. Three of the factors that influence management planning today are their ability to obtain materials and components for manufacturing. the chief executive officer. were not honest and transparent with the stakeholders concerning the issues relating to the accounting fraud and conflicts of interest. they were just as guilty of unethical behaviors as the CEO and his direct reports. ethics. The board members that were aware. including Tyco International Incorporated. when working for Tyco. which helped Tyco.Tyco's corporate culture was driven by the CEO. Dennis Kozlowski. some of the board members were not aware of the fraud. The Tyco guide to ethical conduct The Tyco Guide to Ethical Conduct. therefore. Dennis Kozlowski who admired the extravagant and lavish lifestyle lavish of the former CEO. maintain a 14 year growth within the business units. Tyco survived the scandals and is still in business today because it changed the way that it operates. 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. In some cases. due to the nature of their positions. the rate of attrition for their home security products and services and the ongoing litigation and investigations. He took an assertive approach to acquisitions and mergers. and the relationships that had been established over time. CFO and legal counsel.
it also provides examples of unethical behavior the topics covered in the code are: 1. colour. marital. Equal Employment Outlines the equal opportunity and fair treatment should extend to all employee. aggression or sexual harassment. national origin. ethnicity. The drive to develop this Ethical guide was due to the unethical practices for former CEO Dennis Kozlowski. 4. Along with the incentive payments comes responsibility .as well as freedom . it prohibits discrimination on the basis of age. Due to the unethical behavior and subsequent sentencing of Tyco¶s executives. religion. sought to improve the ethical standards of the company and introduced the Tyco Guide to Ethical Conduct. abusive language. both executives have been sentenced to jail and have also been forced to pay back some of the money. The scheme is focused on growth and earnings targets and all employees benefit when targets are met. 5. Kozlowski and former CFO Mark Swartz were accused of stealing from the company $170 million and $430 million in stock sales. In 2002. race. Safety and the Environment Prohibits the possession of weapons. 3. illegal drugs or other controlled substances. veteran status. . 2. sex. Enforces that stringent safety procedures. disability. unwelcome conduct. Political Activities States employees must comply with all state and local laws regarding participation in political affairs also that employees can not make contributions of company funds to political parties. or family status. does not allow threats of harm. sexual orientation. be adhered to at all times and that all operations are in compliance with the applicable environmental laws. Tyco International is under constant scrutiny now to ensure that the ethical guidelines are followed and that the company is conducting business in manner which is honest and abides by the laws set down in every country. Harassment-Free Workplace States that certain behavior is not permitted such as.for Tyco executives. During Kozlowski¶s time as CEO he adopted a strategic incentive scheme to help the aggressive growth of the organization.Formulation of the Guide The Tyco Guide to Ethical conduct was developed in 2003 to help set ethical standards and code of conduct for its employees. the new CEO Edward Breen. Health. or any other characteristic. Substance-Free Workplace Prohibits being in possession or under the influence of alcohol. Code Topics The guide covers a number of topics and outlines what types of behavior are acceptable and which is not.
Gifts This outlines what kinds of gifts may be acceptable and places a maximum monetary value for these gifts. 10. Propriety and Confidential Information Outlines that the companies proprietary and confidential information not be shared with anyoneincluding coworkers who may not need to know about it. also discusses the use of personal software on company computers. the Internet and the Use of Company Property Discusses the use and duration of E-mail and the internet for personal use. Fraud States that intentional acts of fraud are subject to disciplinary action and include things such as: submitting false expense reports. 12.S generally accepted accounting principles.6. E-Mail. Record-Keeping. Conflicts of Interest Employees must notify human resources if they have any involvement with organizations outside of Tyco. inflating sales figures by shipping inventory know to be defective of non-conforming. it discusses the need for protection of intellectual property and financial information. 13. policies. forging or altering checks. rumors about mergers or acquisitions. Antitrust Looks at ensuring that competition remains free from collusion and unlawful conduct such as: discussing with a competitor price. 9. 7. Inside Information and Trading Tyco Securities Prohibits employees form buying or selling Tyco stock as a result of receiving inside information. or strategies. states that equipment is provided to enable employees to perform their jobs and that the use of company property should be for the sole purpose of conducting business related tasks 14. 11. Financial and Export Controls States that financial records and information must follow the U. also that employees must make decisions bases on the needs of the company not on personal interests or relationships. The Media and Financial Community Any communication with the news or media should be directed to the corporate public relations office. The topic also states that all information must be . it also states that employees are expected to disclose any gifts that they receive to the company. 8. management changes or new products. and effective internal controls. this includes discussing speculation on stock price changes. Restricting the right of a customer to sell or lease a product or service at or above a certain price. costs and production.
The code also includes information about where employees can go for help and includes contact information for the toll free ConcernLINE. Our current approach to meeting goals may not be a sustainable economic model.especially when grounded in the corporate histories we now have ± works.. say something such as. But if you're asked to do something illegal. teamwork and accountability. Get out now. because workers who go down with the ship often are tainted by the organization's implosion. it also discussed record keeping and retention and how documents and files should be saved. prosecutors said at his trial. type that resignation letter. Don't worry about explaining your resignation to potential employers.communicated in an accurate and timely manner.. Application The ethical guide provides employees with a tool in which they can utilize on a daily basis to enable them to make decisions about what sort of behavior is considered ethical or unethical by the company. the office ombudsman or alternative contacts such as the human resources department of the corporate governance office. don't jump up at the next department meeting and say "I work for unethical morons. Handling an unethical situation If you discover an ethically questionable situation at work. "that you had the wisdom to walk away from a bad situation. and we probably ought to fix these problems before they get more serious. it's probably time to update your resume. 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. excellence.salary and benefits." ." Thoughtful input -. Instead. you're still better off losing a job than getting caught up in falsifying financial information. integrity. The guide ties in closely with Tyco¶s vision and values which are." "People tend to see this decision only in terms of what they are giving up by leaving -. for instance. "there are some issues here that we should be concerned about. then tell the truth. . If you feel subtly or blatantly squeezed to cross the line. Bottom Line: y Tyco International chairman and CEO Dennis Kozlowski reportedly hauled home more than $150 million in unauthorized bonuses. But even if you're the sole provider for a family.".
how to act) are when one is faced with a conflict between two or more conflicting morals (i.e. What do you do? Notice that the law may or may not apply to any of these decisions. then fell victim to his own hype. Ethical icons exist. Morals? Ethics? The Law? These three terms are sometimes used interchangeably when in fact they describe different and fundamentally independent concepts. Morals are those values or core beliefs that guide your decisions and are the output of your culture. Let¶s say that you get test results indicating that your product fails to meet its specification limits. The CEO tells you to pass it anyway.e.. The most difficult ethical problems (i. Breaking laws means breaking the social contract to which you agreed in becoming a member of that society. These vary from society to society. and what may be an ethical choice is not always a moral decision. and society to society. If you find that the culture at your company supports unethical practices. In turn this means that the society has the right to punish you by revoking some or all of the rights granted by that society.y y y Jeff Dachis co-founded Razorfish as the dotcom phenomenon surged. how you were raised. . culture to culture. there is often a social price to pay. resign and avoid the taint that comes with the inevitable exposure. such as Southwest Airlines' Herb Kelleher. what we see as right and wrong). Ethics are standards of behavior within a group or society that indicate how we should behave to achieve the moral goals upon which the society places importance. They are what allow you to determine right from wrong.. What is moral and what is not is an internal judgment and varies from person to person. point it out as an issue that needs to be addressed because of the business implications. and so are external in nature. If they do not. and your experiences along the way. but individuals within the society are expected to maintain these standards. as seen in figure 1 below. Ethics are related to how we act and interact with others. Laws are the minimum code of conduct to which the group has agreed to adhere. If confronted with an ethical lapse at work. Clarifying the terms will clarify what type of dilemma you might be facing. What may be a moral choice is not always an ethical one. he was washed out of the Internet consulting firm within just seven years of start-up.
i. In conclusion. our ability to acquire. Therefore. The foundational claim for this theory is that humans are poorly self-interested and there are no moral demands beyond self-interest. and maintain reliable and valid databases is at risk and will continue to be at risk at least in the near future. no obligations to anyone other than µmyself¶. every quality professional is likely to experience this trend at some point in his or her career. We believe that the implications of this reality suggest that every quality professional should: .e. utilize. or whether we are the victims of data-shaving or data-shading. Solutions As quality professionals. not just the quality department.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. 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 regards to ethical egoism an individual believes that whatever serves his own interests is morally right. under this theory. it is understood that humans should act selfishly if they wish to live healthy and meaningful lives.. In a larger sense. Creating an ethical culture and enforcing ethical behavior is the function of upper management. the ethical behavior of a company is certainly part of the ³Quality-with-a-big µQ¶´ that we seek to enhance every day. but there are some things within our control that we can do to improve the situation. I must say that I see many faults in this theory and therefore I do not agree with it. 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. Whether out-and-out fraudulent data are provided to us. The normative claim of ethical egoism is that one should act so as to maximize good and minimize bad for oneself. Another reason I do not agree.
They are extremely well paid. he will face even more serious charges. ethical expectations associated with the provision be clearly specified and that the consequences of failure to comply with these basic standards be swift. severe. but a case can be made that it is unethical. that people with so much pride and ambition often have no limits. if an executive is confident enough to try and bypass the regulations and steal money from an organization. many would find it ridiculous that a corporate executive would even consider stealing money. . Corporate executives such as CEO's of major corporations are among the most elite members of American society. they are at times complex moral mazes with no easy answers. The good news is that these moral mazes can be better navigated if employees are trained in ethical decision-making processes and principles. nothing is ever enough. It is important to understand. and to them. 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 ³do the right thing´ just isn¶t effective. and they are in the position to bring wealth to their families. the Sarbanes-Oxley Act was passed. It is not illegal to place the health of the company and investors¶ money into risky investments for short-term profits. Ethical dilemmas are not clear choices between breaking the law and being law-abiding. After this scandal as well other scandals such as the Enron and WorldCom scandals. The time to avoid the results of unethical behavior is before it occurs. we learned a long time ago that prevention is superior to inspection. In the future. review. In no area might this be more important than business ethics. many citizens lost trust in corporations. they have excellent benefits. and assessment of critical databases for reliability and validity Ensure that among the guidelines provided to external suppliers. not after. we have seen what corporate greed can eventually lead to. Establish internal systems for the periodic sampling. and more internal control are now being implemented. Their greed often gets in the way of their honesty and loyalty to the people around them. In order to reestablish trust and prevent future executives from acting dishonest. CONCLUSION . however. Given the amount of money they are already receiving. resulting in scandals like the one described and demonstrating the need for ethics in business and more acts of government intervention . As quality professionals. "In the case of Tyco International.
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