Corporate Fraud: A Study on

Tyco International
Course: F-310 (Auditing)

Prepared for:
Mohammad Salahuddin Chowdhury, FCA
Assistant Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Prepared by:
Group No: 04
Section B
Department of Finance
University of Dhaka

Date of Submission: 12 December, 2019

 Group Profile: Group 04
Group Members’ Name ID No. Remarks

Abdul Majed Chowdhury 23-005

Rakib Mostak 23-020

Md. Al Amin 23-042

Syma Sunzida 23-111

Md. Junayet Hossain 23-151

Azizur Rahman Rejvi 23-163

Ariful Islam Akash 23-169

Md. Khalid Syfullah 23-172

Nahid Ahmed 23-208

Bir Bahadur Tripura 23-323

 Letter of Transmittal
12 December, 2019

Mohammad Salahuddin Chowdhury, FCA

Assistant Professor
Department of Finance
Faculty of Business Studies
University of Dhaka
Subject: Submission of report on Corporate Audit: A Study on Tyco International.

Dear Sir,

Here is the report on Corporate Audit: A Study on Tyco International which you assigned
us to prepare. The report was assigned to us as a compulsory requirement of your Course-
Auditing(F-310).

In writing this report, we have followed the instructions that you have given us in the class, and
we have also applied relevant concepts that we have learnt throughout our course. However, we
will be glad to clarify any discrepancy that may arise.

Finally, we would love to express our gratitude for your supportive thoughts and kind
consideration in and outside of the class.

Sincerely,

…………………..
Md. Junayet Hossain
On behalf of
Group No:04
ID: 23-151
Section: B
Department of Finance
University of Dhaka
 Table of Contents

1. Company Background ..................................................................................................... 1

1.1 Mission Statement of Tyco International ..................................................................... 1

1.2 Tyco Values ................................................................................................................. 1

1.3 Company Profile in Brief ............................................................................................. 2

2. Fraud Mechanism of Tyco International ....................................................................... 3

2.1 Kozlowski’s Rise ......................................................................................................... 3

2.1.1 Attraction to Lavish Expenditure .......................................................................... 3

2.1.2 Fast Promotion ...................................................................................................... 3

2.2 Kozlowski’s Empire .................................................................................................... 4

2.2.1 Aggressive Management Style ............................................................................. 4

2.2.2 Reforming Management Body.............................................................................. 4

2.2.3 Troubling Relationship with Board Members ...................................................... 5

2.2.4 Dominating Performance in Tyco International ................................................... 6

2.3 Fall of Dennis Kozlowski ............................................................................................ 6

2.3.1 Unusual Commission Payment ............................................................................. 7

2.3.2 False Accounts ...................................................................................................... 7

2.3.3 Reveal of Felony by Kozlowski and Swartz ......................................................... 7

2.3.4 Fall in Share Price ................................................................................................. 8

2.3.5 Penalty to Kozlowski and Swartz ......................................................................... 8

3. Management and Auditors Responsibility .................................................................... 9

3.1 Management responsibility: ......................................................................................... 9

3.1.1 Lack of Effective Corporate Structure .................................................................. 9

3.1.2 Lack of Corporate Governance ........................................................................... 10

 3.1.3 Ineffective leadership .......................................................................................... 10

3.2 The Independent Auditor's responsibilities................................................................ 11

4. Consequences and Present Status ................................................................................ 13

4.1 Consequences of the Fraud ........................................................................................ 13

4.1.1 Damage Control .................................................................................................. 13

4.1.2 Fall in Share Price ............................................................................................... 13

4.1.3 Corporate Governance Re-Boot .......................................................................... 13

4.1.4 Effect on US Economy ....................................................................................... 14

4.1.5 Employees and Directors of Tyco ...................................................................... 14

4.2 Present Condition of Tyco International Limited ...................................................... 15

5. Conclusion ...................................................................................................................... 16

References ........................................................................................................................... 17
 Executive Summary
Tyco International is one of the world largest diversified multinational conglomerates. As Tyco
was regarded as one of the most potential companies of U.S.A, its scandal negatively affected
the investors and the general market conditions. This scandal starts with Tyco International’s
former chief executive officer (CEO) L. Dennis Kozlowski and former chief financial officer
(CFO) Mark H. Swartz. In 2002, they were arrested and charged with misappropriating more
than $170 million from the company. They were also accused of stealing more than $430
million through fraudulent sales of Tyco stock and concealing the information from
shareholders. The two executives were charged with more than thirty counts of misconduct,
including grand larceny, enterprise corruption, and falsifying business records. Another
executive, former general counsel Mark A. Belnick, was charged with concealing $14 million
in personal loans. The story begins in 1992 when Tyco’s corporate governance system was
comprised of Kozlowski and the firm’s board of directors. As directors, they were responsible
for protecting Tyco’s shareholders through disclosure of questionable situations or issues that
might seem unethical or inappropriate. Despite this, almost all of them were fraudulent.
Kozlowski started to expand Tyco into noncyclical industries through more and more
acquisitions. He started to misconducting the companies. As result of this scandal, Tyco’s stock
plunged from $60 per share in January 2002 to $18 per share in December 2002, and investors
lost millions of dollars. After Kozlowski’s resignation, Edward Breen replaced him as CEO.
The company filed suit against Dennis Kozlowski and Mark Swartz for more than $100 million.
The SEC allows companies to sue insiders who profited by buying and selling company stock
within a six-month period. To restore investors’ faith, Tyco’s new management team
reorganized the company and recovered some of the funds allegedly taken by Kozlowski. At
present, Tyco International plc. and Johnson Controls, a multinational conglomerate, entered
into a definitive merger agreement on January 25, 2016. The new company started their
operation as Johnson Controls International plc.

Above all, the story of Dennis Kozlowski shows what happens when too much company power
is put into the hands of an individual—it can lead to a decentralized corporate structure that
makes it difficult to detect misconduct. Tyco’s story also reveals the decreasing tolerance
today’s government and investors have for misconduct in any form, as even members of Tyco’s
board of directors faced consequences for their unethical behaviour.

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 Company Background
Tyco International Ltd. is a diversified manufacturing and service company. It was
incorporated in 1960 in the Republic of Ireland. Formerly it was composed of two major
business segments: Security Solution and Fire Protection. Now it has four main operating
groups: healthcare and specialty products, fire and security services, flow control, and electrical
and electronic components. The healthcare and specialty products group manufactures and
distributes disposable medical supplies and other specialty products and is involved in vehicle
auction and reconditioning services. The fire and security services group is the world leader in
the design, manufacture, installation, and service of fire detection, suppression, and sprinkler
systems, as well as being the world leader in electronic security services. The flow control
group makes and markets pipe, fittings, valves, meters, and related products that are used to
transport, control, and measure the flow of liquids and gases. The electrical and electronic
components group is involved in the manufacture and sale of electric and electronic connection
devices and interconnection systems, printed circuit boards, steel electrical conduit, and
undersea communications cable systems.

1.1 Mission Statement of Tyco International

A mission statement is a short statement of why an organization exists, what its overall goal is,
identifying the goal of its operations: what kind of product or service it provides, its primary
customers or market, and its geographical region of operation. The mission statement of Tyco
International is noted below:

“Tyco is committed to helping protect people, property and businesses. It is dedicated to

advancing fire safety and security by finding innovative ways to save lives, improve
businesses and protect people where they live and work.”

1.2 Tyco Values

 Integrity First  Customer Driven
 Purpose Led  Future Focused
 One Team

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1.3 Company Profile in Brief
Tyco International PLC
Former type Public
Industry Security
Fate Merged with Johnson Controls
(as of September 9, 2016)
Successor Johnson Controls International plc
Founded 1960; 59 years ago (incorporated 1962)
Founder Arthur J. Rosenberg
Defunct September 6, 2016
Headquarters Incorporation: Cork, Ireland
Operational/Corporate: Princeton, New Jersey, United
States (prior to merger with Johnson Controls)
Key people George R. Oliver
(CEO)
Edward D. Breen
(Chairman)
Products Security Solutions, Fire Protection
Owner Johnson Controls
Number of employees 69,000

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 Fraud Mechanism of Tyco International
On September 12, 2002, national television showcased Tyco International’s former chief
executive officer (CEO) L. Dennis Kozlowski and former chief financial officer (CFO) Mark
H. Swartz in handcuffs after being arrested and charged with misappropriating more than $170
million from the company. They were also accused of stealing more than $430 million through
fraudulent sales of Tyco stock and concealing the information from shareholders. The two
executives were charged with more than thirty counts of misconduct, including grand larceny,
enterprise corruption, and falsifying business records. Another executive, former general
counsel Mark A. Belnick, was charged with concealing $14 million in personal loans.

2.1 Kozlowski’s Rise

Dennis Kozlowski went to work for Tyco in 1975, following brief stints at SCM Corporation
and Nashua Corporation. He soon found a friend and mentor in then CEO Joseph Gaziano.

2.1.1 Attraction to Lavish Expenditure

Kozlowski was impressed by Gaziano’s lavish lifestyle—company jets, extravagant vacations,
company cars, and country club memberships. However, Gaziano’s reign ended abruptly in
1982 when he died of cancer. Gaziano was replaced by John F. Fort III. Where Gaziano had
been extravagant, Fort was analytical and thrifty.

2.1.2 Fast Promotion

He soon gained Fort’s attention, and was promoted to president of Grinnell Fire Protection
Systems Company, Tyco’s largest division. At Grinnell, Kozlowski reduced overhead,
eliminated 98 percent of paperwork, and revised compensation programs. Although he slashed
managers’ salaries, he also designed a bonus compensation package that gave them greater
control over possible earnings.

After a few years, Kozlowski became the company’s president and later CFO. However, his
aggressive approach concerned Fort, who wanted to slow the rate of acquisitions in
Kozlowski’s division. Kozlowski’s largest acquisition was Wormald International, a $360
million global fire-protection concern. Integrating Wormald proved problematic, and Fort was
reportedly unhappy with such a large purchase. Fort and Kozlowski also disagreed over rapid
changes made to Grinnell. Kozlowski responded by lobbying to convince Tyco’s board of

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directors that problems with Wormald were a “bump in the road” and that the firm should
continue its strategy of acquiring profitable companies that met guidelines.

2.2 Kozlowski’s Empire

After Fort’s departure, Dennis Kozlowski, then 46, found himself helming Tyco International.
With a new lifestyle—parties and multiple homes in Boca Raton, Nantucket, Beaver Creek,
and New York City—and an aggressive management style, he appeared to be following in the
footsteps of his mentor, former CEO Joseph Gaziano.

2.2.1 Aggressive Management Style

Kozlowski knew Tyco from the bottom up, and stated that he was determined to make it the
greatest company of the next century. Among other things, he recognized that one of Tyco’s
major shortcomings was its reliance on cyclical industries, which tend to be very sensitive to
economic ups and downs. He resolved to expand Tyco into noncyclical industries through even
more acquisitions, such as the Kendall Company, a manufacturer of medical supplies that had
declared bankruptcy two years earlier. Kozlowski quickly revived the business and doubled
Tyco’s earnings. Kendall became the core of Kozlowski’s new Tyco Healthcare Group, which
grew to become the second-largest producer of medical devices behind Johnson & Johnson.
The board rewarded Kozlowski’s performance by increasing his salary to $2.1 million and
giving him shares of the company’s stock.

In 1997, Kozlowski acquired ADT Security Services, a British-owned company located in

Bermuda. By structuring the deal as a “reverse takeover,” wherein a public company is
acquired by a private company so as to avoid the lengthy process of going public, Tyco
acquired a global presence as well as ADT’s Bermuda registration. Tyco was then able to create
a network of offshore subsidiaries to shelter its foreign earnings from U.S. taxation

2.2.2 Reforming Management Body

Kozlowski also restructured Tyco by handpicking a few trusted individuals and placing them
in key positions. One of these individuals was Mark Swartz, who was promoted to CFO. Swartz
was aware of Kozlowski’s business practices. Kozlowski also recruited Mark Belnick, a former
litigator at Paul, Weiss, Rifkind, Garrison & Wharton, to become Tyco’s general counsel.

By this time, Tyco’s corporate governance system was comprised of Kozlowski and the firm’s
board of directors including:

Page | 4
 Joshua Berman Vice president of Tyco
Mark Swartz CFO
Lord Michael Ashcroft British dignitary who joined with the ADT
merger
James S. Pasman Jr. From ADT
W. Peter Slusser From ADT
Richard S. Bodman Venture capitalist
Stephen W. Foss CEO of a textile concern
Joseph F. Welch CEO of Bachman Company
Wendy Lane Private equity investor
John F. Fort III Former CEO and chair of Tyco
Frank E. Walsh Jr. Director of the board

The majority of members had served for ten years or more, and they were familiar with
Kozlowski’s management style. As directors, they were responsible for protecting Tyco’s
shareholders through disclosure of questionable situations or issues that might seem unethical
or inappropriate.

2.2.3 Troubling Relationship with Board Members

There were some troubling relationships with board members. Such as:

 Richard Bodman invested $5 million for Kozlowski in a private stock fund managed
by Bodman.
 Frank E. Walsh, Jr. received $20 million for helping to arrange the acquisition of CIT
Group without the other board members’ knowledge.
 Walsh also held controlling interest in two firms that received more than $3.5 million
for leasing an aircraft and providing pilot services to Tyco between 1996 and 2002.
 Stephen Foss received $751,101 for supplying a Cessna Citation aircraft and pilot
services.
 Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home.
 With his handpicked board in place,

Page | 5
2.2.4 Dominating Performance in Tyco International
With his trusted members, Kozlowski opened a Manhattan office overlooking Central Park,
although the move was not broadcast to the public. For appearances, the firm maintained its
humble Exeter, New Hampshire, office at which Kozlowski preferred to be interviewed.

Between 1997 and 2001, Tyco’s revenues climbed 48.7 percent annually and its pretax
operating margins increased to 22.1 percent. The pace of mergers and acquisitions escalated,
assisted by Mark Swartz, Tyco’s CFO.

In February 2002, Tyco announced that it had spent over $8 billion on more than seven hundred
acquisitions in the last three years. Some of the merged companies were dissatisfied with the
arrangement. Kozlowski forced acquired companies to scale back sharply, eliminating any
segments that were not profitable. The toll on workers in these companies was enormous.

Tyco shareholders and directors, however, were thrilled with the company’s performance,
increasing Kozlowski’s salary from $8 million in 1997 to $170 million in 1999, making him
the second-highest-paid CEO in the United States at the time.

Tyco was organized into four distinct divisions—

Fire protection 53%

Valves, Pipes, and other Flow-Control Devices 23%
Electrical and Electronic Components 13%
Packaging Materials 11%

But, there was little interaction between them. Each division’s president reported directly to
Kozlowski, who in turn reported to the board.

2.3 Fall of Dennis Kozlowski

In early 2002, Kozlowski announced Tyco’s split of its four divisions into independent,
publicly traded companies:

a) Security and Electronics b) Healthcare

c) Fire Protection and Flow Control d) Financial Services

They have built a 4 great portfolio of businesses and over the five years ended September 30,
2001. They have delivered earnings per share growth at a compounded annual rate of over 40
percent and industry-leading operating profit margins in each of our businesses.

Page | 6
2.3.1 Unusual Commission Payment
The board of directors learned that Frank Walsh (one of its members) had received a $20
million commission for his part in securing and aiding the CIT merger, without the knowledge
of the rest of the board. Walsh was fined and later resigned.

Troubled by the notion that Kozlowski had made a major payment without informing them,
board members launched an investigation into whether other board members had earned such
commissions.

2.3.2 False Accounts

The New York State Bank Department observed large sums of money moving in and out of
Tyco’s accounts. What made this unusual was that the funds were being transferred into
Kozlowski’s personal accounts. After purchasing around $14 million in rare artwork,
Kozlowski had the invoices shipped to New Hampshire, although the paintings were actually
destined for his apartment in Manhattan. To assist in perpetrating the fraud, Kozlowski
instructed the shipping company to send empty boxes to New Hampshire along with the
invoices.

2.3.3 Reveal of Felony by Kozlowski and Swartz

In September of that year, Dennis Kozlowski and Mark Swartz, who also had resigned, were
indicted on thirty-eight felony counts for allegedly stealing $170 million from Tyco and
fraudulently selling an additional $430 million in stock options.

 Among other allegations, Kozlowski was accused of taking $242 million from a
program intended to help Tyco employees buy company stock. Together with former
legal counsel Mark Belnick, the three faced criminal charges and a civil complaint from
the SEC. Kozlowski was also accused of granting $106 million to various employees
through “loan forgiveness” and relocation programs.
 Swartz was also charged with falsifying documents in this loan program in the amount
of $14 million. Kozlowski and Swartz were sentenced from eight and one-third years
to twenty-five years in prison with the possibility of reducing the minimum by one-
sixth due to good behaviour and enrolment in prison programs.
 Belnick was charged with larceny and attempting to steer a federal investigation, as
well as taking more than $26 million from Tyco. In 2006, he agreed to pay $100,000 in
penalties to the SEC.

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Several former board members have been cited for conflict of interest:

Frank Walsh Pleaded guilty and agreed to repay $20

million plus an additional $2 million in
court costs
Jerry Boggess Was fired and accused of creating a number
the president of Tyco Fire and Security of “bookkeeping issues” negatively
Division impacting earnings of shareholders
Richard Scalzo, Signed off on Tyco’s 2002 audit and was
the Price Waterhouse auditor fired

2.3.4 Fall in Share Price

Tyco’s stock plunged from $60 per share in January 2002 to $18 per share in December 2002,
and investors lost millions of dollars. Many of the firm’s 260,000 employees were also
shareholders and watched their savings dwindle. Tyco’s retirees found that their savings and
retirement plans, which were tied up in company shares, plummeted with the company’s stock
price.

2.3.5 Penalty to Kozlowski and Swartz

In 2005, Kozlowski and Swartz both were found guilty on twenty-two of twenty-three counts
of grand larceny, conspiracy, and falsifying business records and violating business law. The
judge ordered both to pay $134 million to Tyco. Kozlowski was also ordered to pay a $70
million fine and Swartz a $35 million fine. Jail time for both appears to be a little less than
seven years in a state facility. Both have appealed their sentences, but their sentences have so
far been upheld. After Kozlowski’s resignation, Edward Breen replaced him as CEO. The
company filed suit against Dennis Kozlowski and Mark Swartz for more than $100 million.
The SEC allows companies to sue insiders who profited by buying and selling company stock
within a six-month period.

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 Management and Auditors Responsibility
3.1 Management responsibility:
The management of a business is responsible for ensuring that systems of internal controls are
in place, good business practices are implemented and followed in all areas, compliance is
maintained, fraud risks are identified and mitigated and effective governance is established.
This provides assurance for the stakeholders that the financial information and the other
management information are reliable and fraud risks are minimized.

But When the management of a business is irresponsible, there exists possibility for any
disastrous event to take place in the future. And the corporate failure of Tyco International
Limited happened because of the ignorance and irresponsibility of its management.

3.1.1 Lack of Effective Corporate Structure

Tyco’s corporate structure was highly decentralized with many of its business units having
their own financial statements, internal revenue targets and incentive compensation systems.
The top management was given autonomy to take their activities without any external
interference. Planning their activities was therefore possible without raising any alarm to both
internal and external members.

As Dennis Kozlowski was the chairman and CEO of Tyco International. Thus, he was the
overall command in chief who was not under the control of any other official. Stakeholders,
shareholders and investors trusted him and believed that he was able to take the company to
level of advancement in production and provision of services. However, he used his position
to steal from the company. And due to the organizational structure and controls, he was able to
implement his strategic plans without the knowledge of his juniors or other parties in the
company. Before they could come into terms that what was happening in the company.
Kozlowski had robbed millions of dollars from the company with his close associates

As a result of lack of proper organizational structure, he was able to overstate income reports
and then smooth those earnings. Moreover, he was able to hide large amounts of senior
executive compensation among other activities which left the company in bankrupt. Controls
were not possible as there was no provision that allowed corporate governance to take place.

Also, as the senior executives were given autonomy to take decisions, Dennis Kozlowski
victimized many employees by inappropriate discharge. He had discharged the employees

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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 unfavorable 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.

3.1.2 Lack of Corporate Governance

Lack of corporate governance at Tyco led to its downfall. Normally corporate governance plays
a crucial role in controlling the activities of the firm. Corporate governance is important to
ensure that there is regular check up by all the stakeholders in the company.

But in Tyco International, there was no particular person, who was given charge of corporate
governance. There was no committee that looked into corporate governance principles not there
was a good policy in place that would lead to control over cash disbursements. There was no
direct There were no direct instructions to employees to avoid unethical practices nor was there
any system for reporting ethics violations. No ethics training was provided to executives or
employees. Instructions to executives requiring them to comply with accounting standards or
protection of investor rights were missing.

After learning about the indictments against the Kozlowski, stakeholders, investors and
employees wondered what had happened. This is simply because they did not care to ensure
that there was effective corporate governance in the firm. Indeed, they did not know what was
going on until all the events revealed themselves about the fall of the company.

Corporate governance ensures that companies are controlled and directed as there is close
checking in all the happening in the company. But in Tyco, there was no relationship between
the management, shareholders and its board.

So poor corporate governance made it possible for the top managers to accomplish their plans
of corrupting the money without other members of the firm being aware.

3.1.3 Ineffective leadership

The ineffective leadership at Tyco, led by Kozlowski, contributed greatly to the collapse of the
once booming conglomerate. Kozlowski portrayed characteristics of a selfish, greedy, and
unethical leader who was mainly concerned with his personal interest. He tarnished his image
for those who admired him as a role model over the years.

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Despite Kozlowski having big ambitions for Tyco, he preferred unethical practices in handling
the activities, other that hard work, and determination.

Kozlowski, Swartz and Belnick, were accused of stealing from the company, in terms of
unapproved bonuses and loans, whereby, they would give themselves low-interest loans or
interest-free, which they would camouflage them as bonuses. They were able to even organize
for expensive parties that yielded high transactions as well as other vast array of charges that
could not be accounted for. The leadership team was able to effectively transform the
organizational behaviour and ethical standards to selfishness leading to pilferage of large
amount of money.

It is however evident that the top executive ordered their employees to commit fraud on their
behalf by altering the financial records and offsetting imaginary costs. Sometimes, employees
are left with no choice other than adhering to their seniors’ orders, in order to keep their jobs.

Additionally, Kozlowski and other board members had defrauded and misled investors by
keeping stock prices artificially inflated, not adding any lasting value to the organization for
the stakeholders. This form of extremism does not constitute ethical or sound judgement and
decision making by Tyco’s executives.

Kozlowski was a goal achiever in the way he led Tyco, however, he would go to any lengths
to accomplish those goals, thus hurting the company in the end. The poor leadership by
Kozlowski and his management team resulted in fraud practices at the expense of employees
and stakeholders.

Indeed, the fall of Tyco was directly due to erosion of values of its leaders who were highly
influenced by greed.

3.2 The Independent Auditor's responsibilities

The responsibilities of an independent auditor are to obtain assurance that the financial
statements taken are free from material misstatement, whether these are caused by fraud or
error. So the independent auditor has some responsibility for considering the risk of material
misstatement due to fraud or error.

 For this, auditors have to sustain an attitude of professional scepticism. This means that
the auditors have to recognize the possibility that a material misstatement due to fraud

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 could occur, regardless of the auditor's previous experience of the client's integrity and
honesty.
 Through understanding the entity and its environment ISA 315 detecting and assessing
the risks of material misstatement goes further than this general concept and requires
that engagement teams discuss the susceptibility of their clients to fraud. The
engagement team should also collect information for use in identifying the risk of fraud
when performing risk assessment procedures.
 For making such an assessment, auditors have to identify how management assesses
and responds to the risk of fraud through inquiry. The auditors have to also investigate
of internal auditors, management and those charged with governance if they are aware
of any actual or suspected fraudulent activity.
 In spite of these requirements, there is an unavoidable risk that some material
misstatements may not be detected, even when the audit is planned and performed in
accordance with ISAs. Because of fraud may involve sophisticated and carefully
organized schemes designed to conceal it the risks in respect of fraud are higher than
those for error because fraud may involve sophisticated and carefully organized
schemes designed to conceal it.
 The primary responsibility for prevention and detection of fraud is when the auditor
detects a fraud they should communicate the matter on a timely basis to the appropriate
level of management. The auditor shall communicate such matters to those charged
with governance, if the suspected fraud involves management. When the auditor has
any doubts about the integrity of those charged with governance they should seek legal
advice regarding an appropriate course of action.
 In addition to these responsibilities the auditors have to also consider whether they have
a responsibility to report the occurrence of a suspicion to a party outside the entity.
Whilst the auditor does have an ethical duty to maintain confidentiality, it is likely that
any legal responsibility will take precedent. In these circumstances it is advisable to
seek legal advice.

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 Consequences and Present Status
4.1 Consequences of the Fraud
Former chairman and chief executive Dennis Kozlowski and former CFO Mark H. Swartz
were charged for the theft of more than US$150 million from the company. During their trial
in March 2004, they argued the board of directors authorized it as compensation.
Tyco scandal has a much effect on the world, which greatly influenced by investor sentiment
and global legislations regarding financial market trade and reporting standards. Here we
discuss the consequences that the Tyco fraud had from the perspective of the company, the U.S
economy and the whole world.
4.1.1 Damage Control
After Kozlowski’s resignation, Edward Breen replaced him as CEO. The company filed suit
against Dennis Kozlowski and Mark Swartz for more than $100 million. The SEC allows
companies to sue insiders who profited by buying and selling company stock within a six-
month period. Breen launched a review of the company’s accounting and corporate governance
practices to determine whether any other fraud had occurred. Breen launched a review of the
company’s accounting and corporate governance practices to determine whether any other
fraud had occurred. Although the probe uncovered no additional fraud, the firm announced that
it would restate its 2002 financial results by $382.2 million.

4.1.2 Fall in Share Price

Tyco’s stock plunged from $60 per share in January 2002 to $18 per share in December 2002,
and investors lost millions of dollars. Many of the firm’s 260,000 employees were also
shareholders and watched their savings dwindle. Tyco’s retirees found that their savings and
retirement plans, which were tied up in company shares, plummeted with the company’s stock
price.

4.1.3 Corporate Governance Re-Boot

After the fraud occurring, new CEO reorganized the company and recovered some of the funds
allegedly taken by kozlowski. Shareholders elected a new board of directors and voted to make
future executive severance agreements subject to shareholder approval and voted to require the
board chair to be an independent person rather than a Tyco CEO. They also hired Eric Pillmore
as vice president of corporate governance.

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4.1.4 Effect on US Economy
Tyco as being one of America’s and the world largest diversified multinational conglomerates
with 240,000 employees globally, its fraud scandal automatically had an effect on the overall
economy. As Tyco was regarded as one of the most potential companies of U.S.A its scandal
negatively affected the investors and the general market conditions. In addition, the company
set plans that called for 18,296 job cuts in 2002, but not all of the cuts have taken effect and
are subject to revision,

The real interest rate and inflation dropped from High to low. This was due to poor market
conditions and recession to which Tyco just added more. Although the economy and market
was already in a bad condition the Tyco scandal not only affected investor sentiment but also
had a long lasting effect on the economy as it was a major player composed of two major
business segments: security solutions and fire protection. These two sectors were under severe
pressure due to Enron’s fraud as banks were reluctant to provide loans and many projects were
postponed which resulted in higher prices for the future and most importantly a negative mind-
set about the energy sector to the general investors which took a long for the companies to
regain.

The GDP growth rate is not affected by this scandal compared to other years but it was mostly
due to other sectors’ contributions that were greater than Tyco downturn as although it was one
of the biggest fraud in the history but wasn’t a too significant as a variable that can affect the
GDP of a country.

4.1.5 Employees and Directors of Tyco

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 company set plans that called for 18,296 job cuts in 2002, but not all of the cuts
have taken effect and are subject to revision.

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4.2 Present Condition of Tyco International Limited
Tyco International plc. And Johnson Controls, a multinational conglomerate, entered into a
definitive merger agreement on January 25, 2016. The main reason of merger is thought to be
to escape the United States Taxes by tax inversion. Since the Tyco shareholders would only
hold 44% of the company, Tyco International Plc. Was able to restructure itself to be the
subsidiary of the foreign parent company, Johnson Controls. They now were saving an
estimated amount of US$150 million a year by avoiding US taxes as they moved their tax
residence to a foreign country, Ireland. On September 6, 2016, the merger was completed and
the new company started their operation as Johnson Controls International Plc. Headquartered
in Cork, Ireland. Johnson Controls International Plc. Has showed an audited net income of
$2.162 billion in the year 2018 from revenue of nearly $7.236 billion.

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 Conclusion
The Tyco scandal offers major lessons for the business world, particularly in areas of corporate
conduct. Above all, the story of Dennis Kozlowski shows what happens when too much
company power is put into the hands of an individual—it can lead to a decentralized corporate
structure that makes it difficult to detect misconduct. Tyco’s story also reveals the decreasing
tolerance today’s government and investors have for misconduct in any form, as even members
of Tyco’s board of directors faced consequences for their unethical behaviour.

Tyco’s survival proves that some companies can survive major ethical scandals if they take the
correct courses of action. In response to the scandal, Tyco took actions that went beyond the
bare minimum of what was needed. Although an investigation did not uncover additional fraud,
the company still restated its financial results by hundreds of millions of dollars. It took
measures to restore shareholder confidence by reorganizing the company and implementing
safeguards to ensure greater objectivity on the part of the board of directors. As a result of its
quick actions, the company has recovered significantly and has been praised by the public.

While the fortunes of Tyco International seem to be on the rebound, former CEO Dennis
Kozlowski’s fate remains in the hands of the law. After his sentencing in 2005 to twenty-five
years in jail for grand larceny, securities fraud, other crimes, and for stealing $137 million in
unauthorized bonuses as well as selling $410 million in inflated stock, Kozlowski remains
adamant about his innocence. In an interview with Morley Safer for 60 Minutes, Kozlowski
claimed that jealous jurors sentenced him out of spite, not because he had done anything wrong.
Kozlowski to this day feels that he was wrongly sentenced and claims to have no regrets over
his dishonest behaviour. Much to his frustration, a judge ruled in 2010 that Kozlowski must
forfeit the compensation he had earned over a seven-year period.

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 References
Initiative, D. F. (n.d.). Tyco International: Leadership Crisis. University of New Mexico.

Romero, J. (2017, March 25). Tyco corporate scandal. Retrieved from panmore.com:
http://panmore.com/tyco-corporate-scandal-2002-case-analysis

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