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

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?

Outcome of Tyco's misuse of funds on professional bodies and shareholders:

Professional bodies such as PWC had to pay $225 million to Tyco's International shareholders. The dent to the image of these bodies stay for long if they fail to disclose something which they could have only if they would dig a little deep when they saw the red flag.

Shareholders: Wealth creation and easy retirement are two key elements for retail shareholders before they invest but due to this scam, for people who were holding stock of this company in his/her 401k, it only meant that there was no early retirement or postpone the retirement. Others felt the dent when the stock plunged 80%.

This also created a notion that if Blue chips companies are creating such a structure of ineffective control and wilful frauds, then it may well not worth investing at all.

Challenging part for SEC in investigating this high-profile scandal:

For SEC to prove the allegations of scam done by the company, it needed evidence but since the governance was so tightly controlled by CEO and CFO, they had hard time gathering and linking them to frauds.

SEC investigated the Co. in 1999 as well in regards of its accounting for acquisition which was quite aggressive but eventually dropped the investigation since they were unable to prove any irregularity.

B. What would you suggest to auditing companies and Securities Exchange Commission to take steps to avoid such scams in future?

Answer: -

For Auditing companies:

Auditing companies need to create a culture where they should not provide two distinct services to one single companies which may create conflict of interest.

Further, it is quite clear that the centralization of power within a company was not questioned by auditors which eventually had a material impact. Issues like this should be high on disclosure list such that all the stakeholders are aware about the nature and conduct of management.

For SEC:

SEC although bought SOX for companies to comply for issues such as conflict of interest but companies find different ways to siphon the funds. SEC should be more vigilant and ensure that power of management does not lie at one place.

Board of directors should also be given more teeth such that they don't act a mere puppet for top management.

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?

Outcome of Tyco's misuse of funds on professional bodies and shareholders:

Professional bodies such as PWC had to pay $225 million to Tyco's International shareholders. The dent to the image of these bodies stay for long if they fail to disclose something which they could have only if they would dig a little deep when they saw the red flag.

Shareholders: Wealth creation and easy retirement are two key elements for retail shareholders before they invest but due to this scam, for people who were holding stock of this company in his/her 401k, it only meant that there was no early retirement or postpone the retirement. Others felt the dent when the stock plunged 80%.

This also created a notion that if Blue chips companies are creating such a structure of ineffective control and wilful frauds, then it may well not worth investing at all.

Challenging part for SEC in investigating this high-profile scandal:

For SEC to prove the allegations of scam done by the company, it needed evidence but since the governance was so tightly controlled by CEO and CFO, they had hard time gathering and linking them to frauds.

SEC investigated the Co. in 1999 as well in regards of its accounting for acquisition which was quite aggressive but eventually dropped the investigation since they were unable to prove any irregularity.

B. What would you suggest to auditing companies and Securities Exchange Commission to take steps to avoid such scams in future?

Answer: -

For Auditing companies:

Auditing companies need to create a culture where they should not provide two distinct services to one single companies which may create conflict of interest.

Further, it is quite clear that the centralization of power within a company was not questioned by auditors which eventually had a material impact. Issues like this should be high on disclosure list such that all the stakeholders are aware about the nature and conduct of management.

For SEC:

SEC although bought SOX for companies to comply for issues such as conflict of interest but companies find different ways to siphon the funds. SEC should be more vigilant and ensure that power of management does not lie at one place.

Board of directors should also be given more teeth such that they don't act a mere puppet for top management.