Question

Tyco International Private Limited is operating in over 60 countries and claims to be the largest

designer and maker of undersea telecom equipment’s. Tyco International is also considered as

world's largest maker and provider of electrical and electronic components; and they are also

maker of fire protection systems and electronic security services.

Tyco's former CEO Dennis Koslowski, former CFO Mark Swartz, and former General Counsel

Mark Belnick were blamed of giving themselves interest free loans that were never approved by

the Tyco board of directors. They were also accused of selling their company stock without

informing investors. Koslowski, Swartz, and Belnick stole $600 Million from Tyco International

through their unapproved incentives.

Tyco also incorrectly accounted for certain executive bonuses they paid, thereby excluding from

its operating expenses the costs associated with those bonuses. As a result of these various

practices, Tyco made false and misleading statements and omissions in its filings with the

commission and its public statements to investors and analysts.

a. In your opinion, what was the outcome of Tyco’s misuse of funds on professional bodies and

shareholders? What was the challenging part for SEC in investigating this high profile scandal?

b. What would you suggest to auditing companies and Securities Exchange Commission to take

steps to avoid such scams in future?

Answer 1

Corruption often results in loss of funds through embezzlement and graft. Resources that could be useful in implementing business strategies are derailed or used unproductively. The practice may lead to loss of customers who lose faith in the organization and prefer rival products, leading to losses. Besides, internal or external corruption may force a company to inflate its prices so as to recover lost resources. Competing firms can seize this opportunity to outdo the affected firm, leading to a significant decline in market share for the affected organization. The firm can also accrue losses trying to reassure its customers, partners and the general public, or dealing with sanctions and lawsuits resulting from its corruption activities.

Discouragement of Shareholders and Investors,Reports of corruption in a firm can cause shareholders and investors to lose trust and confidence in the business. Perpetuation of fraud boosts the entrepreneurs’ risk of accruing losses through a decline in sales and misuse of scarce resources among others. Corruption, either internal or external, can discourage potential innovators and entrepreneurs from investing in business opportunities for fear of failure.

Damaged Business Image

Corruption within a firm can dent the image of the business organization concerned. As customers and the general public get a negative picture of the company, they may lose trust in the company and its products. This may result in loss of clients and reputable business partners. It can take time for a business organization to rebuild its reputation and win people’s trust again, if ever.

Business Inefficiency

Because corruption entails improper use of the available resources, it can jeopardize the efficiency of a business organization. Resources that would be used in implementing important business operations are instead employed in unrelated or unproductive functions. Bribery in the process of awarding tenders and contracts may result in enlistment of incompetent contractors. In the process, business efficiency and productivity suffer. Inefficiency can also result from employees who are demoralized -- due to corruption in the business. Besides, fraud in the recruitment process may lead to hiring of incompetent employees who are unproductive in the firm.

An important ethical issue in this case is loyalty. There are two types of loyalty: loyalty to your own supervisor and loyalty to a fellow-employee and loyalty to the company and shareholder interests. The ethical position is to act in accordance with loyalty to the organization and its shareholders that provide the capital. All sorts of problems may develop for you down the road if you support or stand idly by while an employee violates a company policy or worse, commits fraud. Once you begin the silence and/or deny knowledge when questioned, you have begun the slide down the proverbial ethical slippery slope and it will be difficult to take the high road in the future for fear that your prior bad acts will become known.

The role of the Securities and Exchange Commission itself is to maintain efficient, transparent, and effective markets. SEC oversees the involvement and operations of organizations and individual investors. The Commission monitors securities companies, self-regulatory organizations, and the stock markets.

SEC aims to establish more robust regulations for the credit bureaus and over-the-counter derivatives. Originators and issuers must retain interest in securitized debt. Finally, the Commission aims to develop better accounting and regulatory standards. SEC has reported improvements in several important areas, including better risk-based evaluations of financial companies. Targeted training and better methods for fraud detection are also improvements. Risk assessment methods and techniques have been developed and implemented in different departments of the agency. The Commission has expanded its task force, hiring professionals with industry expertise.

ommon violations that may lead to SEC investigations include:

• Misrepresentation or omission of important information about securities
  
• Manipulating the market prices of securities
  
• Stealing customers' funds or securities
  
• Violating broker-dealers' responsibility to treat customers fairly
  
• Insider trading (violating a trust relationship by trading on material, non-public information about a security)
  
• Selling unregistered securities.

B.

1.    Segregate Accounting Duties.

Because of their size, many small businesses have one person that always handles bookkeeping functions such as client receivables, processing client payments, paying invoices, managing petty cash and recording these functions in their accounting system. This makes it easy for cases of fraud to go unnoticed. Businesses should have at least two persons handling these functions interchangeably, keep the handling of cash and accounting functions totally separate, or have the functions performed through a virtual CFO relationship with an accounting firm.

2.    Know Your Employees.

While every business strives to hire honest employees, having a formal hiring routine, even at a small business, can help prevent fraud. Background checks should be performed for all staff handling cash or managing payments (and bank account information) from customers. As the employee’s level of interaction with finances increases, so too should the scrutiny paid to their past, and present, situations.

3.    Maintain Internal Controls.

Even small businesses need to create and maintain internal controls that can prevent or detect fraud. This includes restricting access to financial account data, inventory access, establishing multi-person sign-off on expense reimbursements, overtime, all check writing functions, and other accounting or payroll functions, and performing an overview of audit logs to ensure the integrity of the books.

4.    Scrutinize Business Bank Accounts.

With online banking options, it’s easy to view account activity and statements whenever is convenient, and business management should do this frequently to make sure that paper-based statements in the office have not been manipulated. The key items to look for are missing or out-of-order checks, unknown payment recipients, and checks that were signed over to a third party instead of deposited in a business account. Simply letting staff know that reviewing check activity is part of the accounting review process can help prevent fraud.

5.    Audit the Books Regularly.

Businesses should routinely audit areas that deal in cash, refunds, product returns, inventory management, and accounting functions. Additionally, occasional non-scheduled audits can also help detect fraud in high risk, critical business areas.

6. Get Expert Help.

If a business has implemented fraud prevention steps and the numbers still aren’t adding up, or when there are larger legal implications, in may be prudent to hire a professional accountant to come in and perform a more extensive review and audit of the business’ books and control processes. CPAs and Certified Fraud Examiners can provide extensive help in fraud detection and prosecution, if necessary.

what can I do to avoid being scammed?

Ask questions and check out the answers. Fraudsters rely on the sad truth that many people simply don't bother to investigate before they invest. It's not enough to ask a promoter for more information or for references - fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research.

Research the company before you invest. You'll want to fully understand the company's business and its products or services before investing. Before buying any stock, check out the company's financial statements on the SEC's website, or contact your state securities regulator. All but the smallest public companies have to file financial statements with us. If the company doesn't file with us, you'll have to do a great deal of work on your own to make sure the company is legitimate and the investment appropriate for you. That's because the lack of reliable, readily available information about company finances can open the door to fraud. Remember that unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions.

Know the salesperson. Spend some time checking out the person touting the investment before you invest - even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary history of brokers and advisers quickly - and for free - using the SEC's and FINRA's online databases. Your state securities regulator may have additional information.

Be wary of unsolicited offers. Be especially careful if you receive an unsolicited fax or e-mail about a company -- or see it praised on an Internet bulletin board -- but can find no current financial information about the company from other independent sources. Many fraudsters use e-mail, faxes and Internet postings to tout thinly traded stocks, in the hopes of creating a buying frenzy that will push the share price up so that they can sell their shares. Once they dump their stock and quit promoting the company, the share price quickly falls. And be extra wary if someone you don't know and trust recommends foreign or "off-shore" investments. When you send your money abroad, and something goes wrong, it's more difficult to find out what happened and to locate your money.