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Case Study: Tyco

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, 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 Koslowski, 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 Koslowski'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.

Tyco Corporate Scandal of 2002 (Ethics Case Analysis)

The case of Tycos corporate scandal of 2002 focuses on the problem of unethical business
practice and related issues. Tyco was a large organization that grew through numerous
acquisitions. Tycos case shows that the problem was the unethical business practices of a
number of its top ranking officers, especially CEO Kozlowski. Kozlowski was involved in numerous
financial transactions that were not included in the financial reports of the company. Kozlowski
was also involved in unethical transactions with other Tyco officers and lower ranking employees
to cover up for Kozlowskis illegal financial transactions. Kozlowski even got outsiders involved in
the problem when his second wife received money diverted from the firm. Court proceedings
proved that Kozlowski stole millions of dollars from Tyco, and that his illegal financial transactions
were extensive. Kozlowski and other officers from Tyco were imprisoned. Tyco declined as
investors lost confidence in the company.

This article analyzes the major ethics issues in the Tyco corporate scandal of 2002, CEO
Kozlowskis motivation to avoid sales taxes on art purchases, the relevance of the concept of
commingling assets, and the role of the board of directors in monitoring adjustments in Tycos
programs.
Major Ethics Issues in Tycos Case

Tycos case shows that ethics issues can occur in different parts of an organization. Even outsiders
or third parties could get involved in these ethics issues. The major ethics issues in Tycos case
were as follows:

1. Unethical Leadership
2. Unethical business practice of subordinates
3. Unethical auditing practice on Tycos business

Tycos Unethical Leadership. The unethical business practice of leaders was observed in
Kozlowski. Kozlowski was the main actor in the financial troubles and legal battles in this case.
Kozlowski was the main recipient of the money stolen from Tyco. In addition, he was the main
influential person who persuaded other top-ranking Tyco officers and lower ranking employees to
get involved and to keep silent to cover up for Kozlowskis illegal activities. This case shows that
extensive involvement of Kozlowski and other leaders in unethical and illegal activity brought Tyco
down.

Unethical Business Practice of Subordinates. The complications in Tycos case involved


people other than Kozlowski. Kozlowski recruited the support of other high-ranking officers in the
organization. He also convinced some lower ranking employees to keep their silence in exchange
for financial benefits. Also, Kozlowski convinced one of the board members to keep silent about
the illegal financial transactions on the mansion Tyco paid for the benefit of Kozlowski and his
wife. In exchange, the board member received financial benefits.

Unethical Auditing Practice. The auditing firm PricewaterhouseCoopers responsible for


checking the financial reports of Tyco failed to identify Kozlowskis illegal financial transactions. As
a result, Kozlowskis unethical business practice continued and became extensive. These
practices became more difficult to stop because of absent constraining influence from the
auditing firm.

Kozlowskis Motivation for Avoiding Sales Taxes on Art Purchases

Kozlowskis motivation for trying to avoid sales tax on his art purchases were (1) his materialistic
desires, and (2) his avoidance of raising a red flag on his illegal activities at Tyco.

Kozlowskis materialistic desires pointed to greed for financial or material gains. These desires led
him to commit illegal financial transactions at Tyco. This case shows that Kozlowski had a history
of tax evasion that goes even years before investigations started. Thus, he has a history of
prioritizing materialistic gains over ethical conduct.
Also, Kozlowski tried to avoid paying sales taxes for his art purchases because doing so would
raise red flags for authorities. Sales taxes create formal records of financial transactions. In Tycos
case, the sales taxes amounted to millions because the purchased art items were expensive. It
would have been easier for authorities to detect Kozlowskis illegal financial transactions because
it was unusual for Tyco officers like Kozlowski to make such big purchases in a small amount of
time.

Commingling of Assets in Tycos Case

The concept of commingling of assets in Tycos case refers to the adoption of the view that the
assets of an employee are similar to the assets of the company. Commingling of assets occurred
when Kozlowski considered the assets of Tyco as his own personal assets. The case shows that
Kozlowski used Tycos funds to pay for his personal expenses. He used Tycos money to pay for his
second wifes birthday party. He also used Tycos money to cover the costs of properties he
purchased. He used the companys money to purchase household items and art pieces for his
personal use.

Tycos case shows that commingling of assets made it easy for Kozlowski to use the companys
assets for personal needs. The company had programs that enabled Kozlowski to unethically use
assets for personal needs. Kozlowskis use of Tycos money was not just mere stealing of funds. It
was also an exploitation of the weakness of the financial loopholes in the firm at the time of his
leadership.

Board of Directors and Adjustments in Tycos Programs

It would have been possible for the board of directors to see the adjustments taking place in
programs at Tyco. This would have been so if the board of directors had appropriate mindsets and
activity. Tycos programs were a weakness in the organization. These programs provided benefits
to officers and other employees. The financial programs were opportunities for Kozlowskis illegal
financial transactions and unethical business practices.

The board of directors should have examined these programs to evaluate their appropriateness.
The directors should have identified the programs weaknesses and loopholes, which Kozlowski
and other officers exploited for their own personal benefit for years. Thus, the ineffectiveness of
the board of directors in examining Tycos programs enabled Kozlowskis unethical business
practices.

Unethical Issues Or Legal Issues In Tyco International


The objective of this report is to identify whether there are any unethical issues or legal issues
existed in Tyco International. Moreover, we should be able to describe relevant ethical issues and
thus apply the concepts into the real life example. Throughout this report, we can aware of the
consequences of the unethical behaviours and also help us to learn from the mistake done by the
leader In Tyco International.

1.2 Summary of the case

Tyco Incorporated was founded in 1960 by Arthur J. Rosenberg, situated in Waltham,


Massachusetts. In 1982, to strengthen the company, Tyco were divided into three business
segments which are fire protection, electronics and packaging. Tyco reorganized the company
again in the 1990s which included 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.

In 1992, Leo Dennis Kozlowski became the CEO after climbed up from executive, companys
president, and CFO position. Kozlowski used an aggressive approach to gain acquisitions and
mergers during his period as a CEO. In choosing the Tyco Inc. board of directors, Kozlowski only
picked his own crony and composed the firms corporate governance system.

In 1999, after a stock split, rumours began to spread about Tycos accounting habits. It was said
that Tyco was producing irregular financial accounts, but it was denied by Tycos leaders.
Throughout the years of Kozlowskis leadership, Tyco merged and bought out several companies,
making their profits grow beyond $30 billion.

The Tycos scandal was taken place in 2002 when the board of directors launched an investigation
about their members incorrect behaviour. 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 few Tycos board of directors also been accused in
embezzling of Tyco fund for their private used and were cited for conflict of interest issues. This
scandal has caused the shares value decreased drastically and made the workers breathless.
After the resignation of Kozlowski, Tyco was led by Edward Breen and the firm have been saved.

2.0 Issue Identification and Analysis of Facts

2.1. Major Issue: Conflict of interest Issues

In the case study of Tyco International, the major issue that the case focusing are the issues of
conflict of interest. A conflict of interest exists when a person holds a position of trust involves in a
situation where his personal interests or obligations are incongruence with the interest of those
who give him trust. Besides, conflict of interest also happens when a person give priority to self
interest rather than the interest of the party they serve.

The leaders in Tyco International were caught for involving in various unethical deeds. While they
were holding the position of trust as board of directors, they involved themselves in issues that
conflict with their positions. All the crimes they did showed that they gave priority to self interest
rather than the interest of the shareholders of the company. The following are the issues that
involved with conflict of interest that were in the case study. These issues will be clearly explained
below.

2.1.1: Leaders Embezzlement of Company Funds

Embezzling fund is a big issue which involved conflict of interest in this case study. Embezzlement
is a kind of financial fraud. It involved the act of dishonestly appropriating assets by one or more
individuals to whom such assets have been entrusted. This act is a conflict of interest in this case
study as the leaders in Tyco International give priority to self interest rather than the interests of
the shareholders and stakeholders. In order to fulfil self interest, luxurious life, the leaders
embezzled the company funds that should be used to manage the company in the best interest of
shareholders and stakeholders. The deeds of the leaders in the company were unethical.

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 fulfil his own desire of having a
lavish lifestyle. From the case, we could identify that Kozlowski had exploited the right of his
employees by taking a large amount from a program that could help the employees to buy
company stock in order to buy himself luxury homes, yachts and fine arts. Besides Kozlowski,
another director, Lord Michael Ashcroft also involved himself in misappropriating the company
fund. He used Tyco funds to purchase a home. Their deeds were unethical; they should not exploit
others for their own benefits.

Furthermore, the principles of duty were also breached by the board of directors in Tyco
International by embezzling company fund. Principles of duty apply that each person has his or
her own duty or obligation that he or she should fulfil as a human being. In this case, Kozlowski
and other directors had their duties to manage the company well. However, they did not manage
the company well as they had misappropriated the funds. Embezzling fund had caused them did
not fulfilled their duties and violated them. This is again proved that they had been wrong in their
deeds.
Why is embezzling fund happened in Tyco International and almost all the directors were involved
in it? According to our analysis towards the case, corporate culture played important role. Thorsen
(n.d.) explained that 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 peoples
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.

Cultivation of this culture created assumption to the directors that embezzling fund is correct and
is a normal thing to apply in the company. Unethical corporate culture could not maintain the
sustainability of the company. In this case, Tyco International was nearly corrupted or ruined
because of the unethical corporate culture. However, new management team had saved the
company by promoting ethical conducts. Hence, corporate culture is the reason caused
embezzling fund among the boards of directors.

Corporate culture shaping can be seriously influenced by leadership. Leader is important in


shaping the corporate culture as most of the employees were guided by tone at the top.
Leaders behaviour, personality, acts in the company would always been set as example in the
company. The unethical corporate culture in Tyco International was due to the unethical
leadership of CEO of the company, Kozlowski. The example set by Kozlowski to misappropriate the
fund of company had been followed by the other directors. Hinrich (2007) mentioned that the
subordinates could be influenced by the leaders to engage in crime if they act as a follower to
their leaders. On the other hand, Kozlowski he himself was also influenced by his former mentor
and leader, Joseph Gaziano. Kozlowski admired Gazianos lavish lifestyle and later during his
empire in Tyco International, he imitated the lifestyle of Gaziano. He gave himself luxurious
lifestyle by using company fund.

Hence, embezzling fund is an unethical issue in the case study.

2.1.2: Bribery

Another ethical issue under conflict of interest in the scandal of Tyco International is bribery.
Bribery involves offering or accepting something of value in a situation where the person who
accepts the bribe is expected to perform a service which goes beyond his or her normal job
description. In many regions of the world, bribery is considered a crime, and it can be severely
punished. This issue is a conflict of interest because the directors of Tyco have used their position
of trust in the company to fulfil their personal interest rather than the shareholders interest which
is to manage the company well.

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 Tycos board of director received $751 101 for
supplying a Cessna Citation aircraft and pilot services.

Bribery is an unethical behaviour because it violated the Utilitarianism Theory. According to


Bellevue College (n.d.), utilitarianism is a moral theory that applies to particular actions and takes
an action to be morally right if and only if it produces the highest utility of any available
alternative action. It also can be said that we should act in ways that bring most pleasure or
happiness to the greatest number of people affected by our actions or else the action is wrong.

As mentioned above, Foss received commission" for supplying aircraft and pilot services to Tyco
International. It is unethical because Foss have failed to consider all the consequences to all
parties that effected. He should also consider for other companies that intended to supply the
services to Tyco International. By doing this also, he was undermining the bidding system if Tyco
using this system to choose the supplier.

Besides principles of utilitarianism, this company also had abused the principle of rights. Principle
of rights is the duty-based principle. In this principle, one should not make decisions based upon
the consequences but should observe his or her duties as human being rights. The employees
and the shareholders have the rights to know the company actual activities. Based on what Frank
E. Walsh Jr., he should disclose the information to the management group and the shareholders
about the fees that he received from the arrangement of the acquisition of CIT Group. Ironically,
Walsh has refused to do so and he took all the fees" for his personal use. With this kind of act, he
had broken the rules and it is an unlawful behaviour.

2.1.3: Accounting Fraud

The third ethical issue in Tyco case that relate to conflict of interest is accounting fraud.
Accounting fraud can be described as any act or attempt to manipulate the financial statement
for financial gain. It can be one of the legal issues in this case because it consists of fraud which is
unlawful in written law. The conflict of interest arises in this case because the auditors,
accountants, and executives of Tyco International erode trust and their personal interest has
greatly varied with the interest of shareholders and the stakeholders in Tyco. They tend to
sacrifice the quality of financial reporting information for their personal interest.

In this case, Tyco International failed to give true financial picture for several years. Dennis
Kozlowski, Mark Swartz and Mark A. Belnick were those Tycos 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 (Andrew and Alex, 2002). In addition, Scalzo (Tycos former auditor) who
audited Tyco's financials from the years 1997 until 2001, found that he failed to conduct sufficient
steps in audit procedures which related to certain executive benefits, executive compensation,
and related party transactions. Furthermore, he also engaged in improper professional conduct
(Taub, 2003).

The act of those executives violated the principle of utilitarianism. Based on this theory, we
should act in a way that produces the greatest happiness to the greater number of people
affected by our action. The executives failed to consider certain persons who may be affected by
their actions. Because the company's true value is unknowable, the investors cannot evaluate
and analyst the companys performance which indirectly will cause wrong decision making. Not
only that, tax evasion of the company will cause the government lose the chance to invest the
money for development process. Moreover, the company does not has the opportunity to use
those extra expenses that concealed by the executives in other areas. In addition, top
management could not compare their company performances with other company as their
financial statement does not provide true picture.

It is also unethical based on the principle of rights which is the right that are the result of
particular roles and special relationship. The government, shareholders and creditors have the
right to know the accurate figures of the financial statement and true position of the companys
performance. Any act that violated the human rights is deemed unethical.

On the other hand, accountants and auditors in this case have breached their fiduciary duty. They
failed to provide an accuracy and reliability of financial statement and failed to act in best interest
of shareholders and stakeholders (creditors, bankers and the users of financial information). They
involved in earnings management and tried to overstate the earning to show a more favourable
statement. It is also called as deception because they provided false statement and created
untrue position.
As a conclusion for the issues discussed for conflict of interest, the company had taken some
actions. The actions taken include enhanced corporate governance practice, applied more
conservative accounting to replace the pattern of aggressive accounting that adopted previously,
replacing a completely new board of directors and more. These actions bring good effects to the
company and increased ethical conducts of the company.

2.2 Minor Issue: Inappropriate discharge of employees

Inappropriate discharge of employees is a minor ethical issue in this case. Inappropriate discharge
of employees means that the employees were forced to be terminated by the employer without
justice. In this case, Dennis Kozlowski had discharged the employees without any notice when he
found out that some of the merged company did not perform well in producing the revenue. Apart
from that, those who give unfavourable review to Tyco will be dismissed by Kozlowski including
David, a short seller who only expressed his opinion on the acquisition of Tyco by using large
reserves. Besides, Jeanne Terrile (stock analyst of Tyco) was fired because of giving adverse
opinion on Tyco rapid acquisitions and mergers.s law essay is an example of a student's wcl

The CEO of Tyco International, Kozlowski cannot victimize their employees without appropriate
reason. He failed to follow two basic principles under discharge of employees. He fired the
employees without looking at their related job performances. It has violated the principle of just
cause. Besides, Kozlowski does not refer to the fairness of procedures used to discharge the
employees also contravene to the principle of due process. He failed to give the notice to the
employees and failed to make compensation and pension to the employees that have been
discharged by him. In this case, he does not treat his employees fairly and justly.

In addition, the way of Kozlowski treated his employees is one kind of abuse of official position. He
abused his power as CEO by treating the employees unfairly and unjustly and discharged them as
he like without any appropriate reason.

On the other hand, employees have the right to speak and have the right to be treated fairly and
justly. The employer in this case had violated the employees right. For example, it is the duty for
the Jeanne Terrile, stock analyst to comment the actual performance of Tyco International, he has
the right to speak out the true picture of Tyco. Kozlowski should respect his opinion.

Moreover, based on the principle of universalizability, we should treat others the way you want to
be treated. In this case, Kozlowski must put herself as an employee of the company, he may dont
want his employers fired him without any appropriate reason.

Apart from that, based on principle to ends, we must respect humanity and never exploit others
to achieve our objectives. In this case, Kozlowski who behave in profit oriented exploited the
employees by eliminated anyone that did not produce revenue to the company. His act is
unethical.

3.0 Recommendations and Conclusion

3.1 Recommendations

After the analysis of problem issued from case study, we would like to give some
recommendations in order to improve the situation of the company.

Conflict of interest was the major issue in this case. The new management in the company had
elected a completely new board of director and assigned an independent person to be the
chairman, rather than a CEO to avoid the conflict of interest to happen again. The actions taken
by the company could be effective.

However, in our opinion, the company should also cultivate an ethical corporate culture. To do so,
code of conduct should be set by the company. International Labour Organization (n.d.)
mentioned that code of conduct is a companys statement to explain ethical standards and
applications that should be apply by the employees. Code of conduct could promote ethical and
moral deeds among the employees in the company. By following the code of conduct, the
employees could avoid themselves from convicting in conflict of interest. The guidelines to the
code of conduct should be given to employees so that employees could further understand it.

Besides the set of code of conduct, the company should also organize seminars and training for
the employees in order to teach the employees to deal with issue that related with conflict of
interest for example the issue mentioned in the analysis before, which are embezzling fund,
accounting fraud, bribery and etc. Whistle blowing culture should be encouraged to the
employees during the training and seminars.

Whistle blowing is an act that raises concern towards the person who involved in wrong doing.
While promoting the whistle blowing, the company should also set up protections towards the
whistle blower to protect them from the possibility of being boycott by the colleagues. The
protections given could at the same time enable the whistle blower to raise the wrong doing of
others without any fear. The example of the protection that can be given by the company includes
keep the information of the whistle blower confidential. With a whistle blowing culture, the fraud
that may happen could be reduced.

Just as what had been mentioned in the analysis, leadership plays important role in shaping
corporate culture. The top management should have ethical leadership so that the subordinates
could have a good role model to follow. A right tone at the top is important to be set by the
leaders to encourage the ethical conduct among the employees. A leader who is responsible and
honest can help promote and transfer his or her ethical and moral value to the subordinates.
Hence, while recruiting new manager or promoting an employee to become a manager, the
criteria that company should consider and emphasize not only the ability but also the personality
and ethical view of the person.

For the issue of inappropriate discharge of employees, we suggest that Tyco International should
provide sufficient notice and pay sufficient compensation to the employees who have been
discharged. The company should set the fairness procedures in the process of discharging
employees. The executive of Tyco should know that employees are primary stakeholder in the
company. They should protect the employees right and respect them.

3.1 Conclusion

In every business, the company will always facing such ethical dilemmas and then raise the
ethical issues. Most of the ethical issues in the Tyco International related to conflict of interest.
Embezzling fund, bribery, accounting fraud were all the issues that we had mentioned in the
paragraphs before which relate to conflict of interest. All these issues were also unethical in other
perspective besides from the perspective of conflict of interest. These issues had also breached
other ethical theories which we had further explained.

Due to the unethical issues that rose in the company, Tyco International had faced the problem of
sustainability. The company was nearly ruined by the unethical leaders. From this point of view,
we could conclude that ethics played crucial role in sustaining the company. A company without
ethical conducts will not last longer than a company which has high and good ethical conduct.

As a conclusion, the company should play their roles by properly managed their company by
following the code of conduct and effectively controlled in all division. By doing that, the company
will run their businesses in ethical way and those unethical issues such as embezzlement of fund,
inappropriate employees discharge, giving or receiving bribes, and also accounting fraud will not
happen again or at least will be decrease.