ACCOUNTING SCANDAL REPORT

TYCO
1996 - 2002

PREPARED BY :

HARRAM AYESHA
AHMED ARIF
 Contents

Student Introduction........................................................................................................................ 1

Executive Summary ........................................................................................................................ 2

History of the Company .................................................................................................................. 3

Growth of the Company.................................................................................................................. 4

How it started .............................................................................................................................. 4

SBUs (Strategic Business Units) ................................................................................................. 4

Reason of Growth........................................................................................................................ 4

How the Fraud Started .................................................................................................................... 5

Duration of Fraud ............................................................................................................................ 5

Key players of the fraud .................................................................................................................. 6

Who was the whistle blower? ......................................................................................................... 7

Did Audit Firm engage in the fraud? .............................................................................................. 8

When & how were they caught? ..................................................................................................... 9

Charges against them .................................................................................................................... 10

Criminal Charges: ..................................................................................................................... 10

Civil Charges: ............................................................................................................................ 10

How the fraud can be prevented?.................................................................................................. 11

Student Information
 Executive Summary

This report provides an overview of Tyco International Ltd., now known as Johnson Controls,
focusing on its growth trajectory, the fraudulent activities that occurred in the early 2000s, and the
subsequent legal proceedings. Tyco, founded in 1960 as Tyco Laboratories, initially operated in
the specialty chemicals and materials industry. Under the leadership of CEO Dennis Kozlowski,
Tyco underwent significant expansion through strategic acquisitions in the security systems and
fire protection sectors. However, a major scandal erupted when financial irregularities were
uncovered, leading to the conviction of Kozlowski and others.

The growth of Tyco was primarily driven by its aggressive acquisition strategy, which allowed the
company to enter new industries and expand its product and service offerings. The key acquisitions
in the security systems and fire protection industries played a crucial role in Tyco's success. The
fraud at Tyco was orchestrated by CEO Dennis Kozlowski and CFO Mark Swartz, who engaged
in financial irregularities and misappropriation of company funds. Their fraudulent activities
included manipulating financial statements, inflating earnings, awarding unauthorized bonuses,
and using company funds for personal expenses. The fraud lasted from 1996 to 2002 and was
exposed through the actions of whistleblower Richard Scalzo, who alerted authorities to potential
accounting improprieties.

No direct involvement of the audit firm in the fraud was identified. However, subsequent reforms
were implemented to strengthen the oversight and independence of audit firms. The discovery of
the fraud had significant repercussions for Tyco, leading to restructuring efforts and governance
reforms. Tyco underwent restructuring and eventually merged with Johnson Controls in 2012.
 History of the Company
Tyco International Ltd., now known as Johnson Controls, was a multinational corporation that
operated in various industries including security systems, fire protection, and industrial products.
The company was founded in 1960 by Arthur J. Rosenberg as Tyco Laboratories. Initially, Tyco
focused on developing and manufacturing specialty chemicals and materials.

In the 1980s and 1990s, Tyco underwent significant expansion and diversification under the
leadership of CEO Dennis Kozlowski. Through a series of acquisitions, Tyco entered the security
systems and fire protection markets. Notable acquisitions during this period included ADT
Security Services and SimplexGrinnell.

Tyco faced a major scandal in the early 2000s when it was revealed that Kozlowski and other top
executives were involved in financial irregularities, including unauthorized bonuses and inflated
stock prices. Kozlowski was convicted of fraud and larceny in 2005.

In the aftermath of the scandal, Tyco underwent significant restructuring. The company split into
three separate entities in 2007: Tyco International, Tyco Electronics, and Covidien (later acquired
by Medtronic). In 2012, Tyco International merged with Johnson Controls, a leading provider of
automotive batteries and building efficiency solutions, forming Johnson Controls International plc.

Today, Johnson Controls is a global diversified technology and multi-industrial leader. The
company provides products, services, and solutions for smart buildings, energy efficiency, and
security systems. With a strong emphasis on sustainability and innovation, Johnson Controls
continues to shape industries and contribute to the development of smart and sustainable
infrastructure worldwide.
 Growth of the Company
How it started

Tyco Company, now known as Johnson Controls, had its beginnings in 1960 when Arthur J.
Rosenberg founded Tyco Laboratories. Tyco began as an investment and holding company
focused on solid-state science and energy conversion. Initially, the company focused on
developing and manufacturing specialty chemicals and materials. Over time, Tyco expanded its
operations and ventured into various industries, leading to significant growth.

SBUs (Strategic Business Units)

 Security systems industry One of the key drivers of Tyco's growth was its strategic
acquisitions. In the 1980s and 1990s, under the leadership of CEO Dennis Kozlowski, Tyco
embarked on an aggressive acquisition strategy. The company aimed to diversify its business
portfolio and enter new markets. One of the notable acquisitions was ADT Security Services,
a leading provider of electronic security systems. This acquisition marked Tyco's entry into the
security systems industry, which became one of its core business units.
 Fire protection Industry Another significant acquisition was that of SimplexGrinnell, a
leading fire protection and life safety systems company. This acquisition allowed Tyco to
establish a strong presence in the fire protection industry. Tyco further expanded its reach in
this sector by acquiring other fire protection companies, enhancing its product offerings and
market share.
 Other SBUs Apart from security systems and fire protection, Tyco also operated in other
sectors such as flow control, electrical and metal products, and healthcare. The company
had separate strategic business units (SBUs) for each industry segment, enabling focused
operations and targeted solutions for customers.

Reason of Growth

The growth of Tyco was fueled by its ability to identify and capitalize on market opportunities
through acquisitions, which allowed it to enter new industries and expand its product and service
offerings. By strategically diversifying its business portfolio, Tyco became a global leader in
security systems, fire protection, and other industrial sectors.
 How the Fraud Started
The fraud at Tyco Company, which occurred in the early 2000s, was primarily orchestrated by the
company's CEO at the time, Dennis Kozlowski, and the CFO, Mark Swartz. The fraudulent
activities involved various unethical practices that led to financial irregularities and
misappropriation of company funds.

Manipulating Tyco's financial statements and inflating the company's earnings

The fraud started with Kozlowski and Swartz manipulating Tyco's financial statements and
inflating the company's earnings. They achieved this by engaging in accounting fraud, such as
falsely categorizing certain expenses as capital expenditures or omitting certain liabilities from the
financial reports. These actions created a distorted picture of Tyco's financial performance, leading
to inflated stock prices and misleading investors.

Unauthorized bonuses and extravagant compensation packages

Additionally, Kozlowski and Swartz awarded themselves unauthorized bonuses and extravagant
compensation packages without proper approval from the board of directors or shareholders. They
used various schemes to conceal these payments, such as fraudulent loans and unauthorized
forgiveness of company loans.

Funds for personal expenses

The fraudulent activities also extended to the misuse of company funds for personal expenses.
Kozlowski and Swartz engaged in lavish spending on personal items, including artwork, luxury
homes, yachts, and extravagant parties. They used company funds to finance these personal
indulgences, disguising them as legitimate business expenses.

Duration of Fraud
The fraud at Tyco Company spanned over a period of several years, it began in 1996 and
continued until 2002 when the fraud came to light.
 Key players of the fraud
The key players involved in the fraud at Tyco Company were primarily the top executives at the
time, including:

Dennis Kozlowski (CEO): Kozlowski was the CEO of Tyco from 1992 until 2002. He played
a central role in orchestrating the fraud. He was responsible for manipulating Tyco's financial
statements, inflating earnings, and engaging in various unethical practices. Kozlowski also
approved and received unauthorized bonuses and used company funds for personal expenses.

Mark Swartz (CFO): Swartz served as the Chief Financial Officer of Tyco during the period
of the fraud. He worked closely with Kozlowski and played a significant role in executing the
fraudulent activities. Swartz was involved in the manipulation of financial statements, the
concealment of unauthorized bonuses, and the misappropriation of company funds for personal
use.

Mark Belnick (General Counsel): Belnick was the General Counsel of Tyco during the
fraudulent period. While he was not directly involved in the financial misconduct, he was
charged separately for allegedly receiving an improper $12 million bonus and for concealing
the details of loans provided to Kozlowski.

These key players were instrumental in planning, executing, and benefiting from the fraudulent
activities at Tyco. Their actions violated ethical standards, breached fiduciary duties to the
company and shareholders, and resulted in significant financial harm to Tyco and its stakeholders.
 Who was the whistle blower?
The whistleblower who played a crucial role in uncovering the Tyco fraud was an employee named
Richard Scalzo. Scalzo was a financial analyst at Tyco who grew suspicious of certain financial
practices within the company. He became aware of questionable transactions and alerted his
supervisors, expressing concerns about potential accounting improprieties.

Scalzo's concerns eventually reached outside authorities, including the U.S. Securities and
Exchange Commission (SEC) and the Manhattan District Attorney's Office. His actions triggered
investigations into Tyco's financial affairs and led to the exposure of the fraudulent activities
perpetrated by Dennis Kozlowski, Mark Swartz, and other key executives. While Mark H. Swartz
later cooperated with investigators and provided information about the fraud, it was Richard
Scalzo's initial whistleblowing that set the wheels in motion and brought the misconduct to the
attention of the authorities.
 Did Audit Firm engage in the fraud?
In the case of the Tyco fraud, there is no evidence to suggest that the audit firm directly engaged
in the fraudulent activities. The primary responsibility for the fraud lies with the top executives
at Tyco, namely CEO Dennis Kozlowski and CFO Mark Swartz, who manipulated financial
statements, engaged in accounting fraud, and misappropriated company funds.

Audit Firm of Tyco

However, it is worth noting that the role of the audit firm in detecting and preventing fraud is an
important aspect to consider. In the Tyco case, the audit firm responsible for auditing Tyco's
financial statements was PricewaterhouseCoopers (PwC). PwC was the external auditor engaged
by Tyco to provide an independent assessment of the company's financial reporting.

Following the discovery of the fraud, questions were raised about the effectiveness of PwC's audits
and their ability to identify the fraudulent activities taking place at Tyco. Critics argued that the
audit firm should have been more diligent in scrutinizing Tyco's financial statements and
uncovering the irregularities. In response to the scandal, regulatory bodies and industry
organizations implemented various reforms to enhance the independence and effectiveness of
auditing practices. These reforms aimed to strengthen the oversight of audit firms and improve the
detection of fraudulent activities within audited companies.
 When & how were they caught?
The fraud at Tyco came to light in 2002 following suspicions and investigations prompted by
several factors. The exact timing and events leading to their exposure are as follows:

Suspicions and anonymous letter: In late 2001, an anonymous letter was sent to Tyco's board
of directors, raising concerns about potential improprieties within the company. The letter
alleged that CEO Dennis Kozlowski and other top executives were engaged in financial
misconduct and unauthorized activities.
Internal investigations: In response to the anonymous letter and growing concerns, Tyco's
board of directors initiated internal investigations into the allegations. They hired outside
counsel and forensic accountants to examine the company's financial affairs.
Discovery of financial irregularities: The investigations conducted by the external
professional revealed substantial financial irregularities and evidence of fraudulent activities.
The irregularities included inflated earnings, misappropriation of company funds,
unauthorized bonuses, and questionable accounting practices.
Public disclosure: In June 2002, Tyco publicly disclosed the initial findings of the internal
investigations. The company announced the discovery of financial improprieties and
confirmed that CEO Dennis Kozlowski and CFO Mark Swartz were no longer with the
company.
Legal proceedings and criminal charges: Following the public disclosure, criminal charges
were brought against Kozlowski, Swartz, and other executives involved in the fraud. They
were charged with various offenses, including fraud, conspiracy, and grand larceny.
Trials and convictions: The trials of Dennis Kozlowski and Mark Swartz took place in 2004.
In June 2005, both were found guilty of multiple charges related to the fraud. Kozlowski was
sentenced to imprisonment for a term of 8 1/3 to 25 years, while Swartz received a sentence of
8 to 25 years.

The discovery of the fraud and subsequent legal proceedings had significant repercussions for
Tyco. The company underwent a major restructuring and implemented governance reforms to
restore its reputation and strengthen its financial practices.
 Charges against them
In the case of the Tyco fraud, several charges were filed against the key individuals involved,
including CEO Dennis Kozlowski and CFO Mark Swartz. These charges encompassed both civil
and criminal offenses. The charges against them are as follows:

Criminal Charges:
1. Securities Fraud: Kozlowski and Swartz were charged with securities fraud, which
involved the manipulation of Tyco's financial statements and the dissemination of false and
misleading information to investors.

2. Conspiracy: They were charged with conspiracy, which encompassed their collaboration
and agreement to commit fraudulent activities, including the misappropriation of company
funds and the unauthorized granting of bonuses.

3. Grand Larceny: Kozlowski and Swartz faced charges of grand larceny, relating to the
misappropriation of millions of dollars from Tyco for personal gain.

4. Falsifying Business Records: They were charged with falsifying business records, as they
manipulated and misrepresented financial records to conceal their fraudulent activities.

Civil Charges:
1. Breach of Fiduciary Duty: Kozlowski and Swartz were accused of breaching their fiduciary
duty to Tyco and its shareholders by engaging in fraudulent activities, misusing company
funds, and putting their personal interests above those of the company.

2. Unjust Enrichment: The civil charges included allegations of unjust enrichment, asserting
that Kozlowski and Swartz enriched themselves at the expense of Tyco and its stakeholders
through their fraudulent actions.

The charges brought against Kozlowski and Swartz were significant and reflected the severity of
their fraudulent conduct and the financial harm caused to Tyco and its shareholders. Ultimately,
both individuals were found guilty of multiple criminal charges, resulting in substantial prison
sentences and significant financial penalties.
 How the fraud can be prevented?
To prevent fraud within Tyco Ltd., the following measures could have been taken:

 Strong Ethical Culture: Foster a culture of ethics and integrity throughout the organization.
This can be achieved by promoting ethical values, setting clear expectations, and ensuring that
employees understand the importance of ethical behavior in all aspects of their work.
 Tone at the Top: Ensure that senior executives and leaders demonstrate and communicate a
commitment to ethical conduct. They should lead by example and actively promote a culture
of honesty, transparency, and accountability.
 Comprehensive Compliance Program: Implement a robust compliance program that
includes policies, procedures, and training to educate employees on ethical standards, legal
requirements, and the consequences of non-compliance. Regular training sessions and updates
should be provided to reinforce the importance of ethical behavior.
 Internal Controls and Oversight: Establish strong internal controls and oversight
mechanisms to prevent and detect fraudulent activities. This includes segregation of duties,
regular internal audits, and independent reviews to identify potential risks and vulnerabilities.
 Whistleblower Mechanism: Create a safe and confidential reporting mechanism for
employees to report suspected fraud or unethical behavior without fear of retaliation.
Encourage employees to speak up and provide protection for whistleblowers.
 Regular Audits and Independent Reviews: Conduct regular internal and external audits to
assess the effectiveness of internal controls, identify weaknesses, and detect any irregularities
or signs of fraudulent activities.
 Strong Ethical Hiring Practices: Implement thorough background checks and due diligence
when hiring employees, particularly for positions with financial responsibilities or access to
sensitive information.
 Regular Risk Assessments: Conduct periodic risk assessments to identify and mitigate
potential areas of vulnerability to fraud. This involves analyzing internal processes, systems,
and external factors to proactively address emerging risks.