Question

Tyco International, the conglomerate whose former chief was convicted of looting the company, would pay $US50 million to settle accounting fraud charges, United States authorities said yesterday. The penalty was for an alleged $US1 billion overstatement of Tyco results between 1996 and 2002 in an accounting fraud "orchestrated at the highest levels of the company", the US Securities and Exchange Commission said. The lurid details of how former chief executive Dennis Kozlowski spent Tyco's money -on a $US2 million birthday party for his wife in Sardinia and a $US6000 shower curtain for his $US18 million Manhattan apartment, for instance - came to symbolise corporate excess during a time of scandals. Kozlowski was sentenced for stealing more than $US150 million from Tyco in a case that also led to the conviction of former chief financial officer Mark Swartz. The Bermuda-based Tyco said the $US50 million SEC settlement, the cost of which it had previously reported, closed the agency's probe of its former officials' accounting

practices. Tyco neither admitted nor denied wrongdoing, as is customary in SEC settlements. The SEC said Tyco inflated profit by at least $US500 million through improper accounting of some of the acquisitions it made from 1996 to 2002. Required: a. In this Tyco’s case highest level of company executives were involved in criminal activities and stole from the company. Suggest steps & guidelines to prevent unacceptable practices. b. Do you think management of company has an ethical and moral responsibility towards shareholders? Comment briefly.

Answer 1

Steps and guidelines to prevent unacceptable practices:

1. Reduce and restriction of cash transactions: Cash Transactions are more prone to fraud and theft. So the company should switch to digital transactions. Highly use of cash also leads to difficulty in detecting internal theft.

2. Perfoming internal and external audit: This is most important in case of frauds done by highest level of company. An internal audit also helps in preventing fraud as regular check on accounts of the company will be there. External audit is must as we know that internal auditor may or may not be independent but external auditor should be independent.

3. Limit Access: No one should be given unlimited access to any financial information and physical assets and proper seggregation of duties should be there.

4. Reviewing Documentation: Regular review of documents is a great method to prevent fraud.

Yes the management has an ethical and moral responsibility towards shareholders. The main responsibility is to ensure safety of investment made by shareholders. To provide equal opportunity to shareholder to participate in management of the business. Also to provide adequate return to shareholders on their investment.