Course:MGMT405 2020W2/Tyco
| Industry | Security |
| Successor | Johnson Controls International |
| Founder | Arthur J. Rosenberg |
| Founded | 1960 |
| Defunct | September 2016 |
| Current Status | Merged with Johnson Controls
International (effective of September 2016) |
| Headquarters | Cork, Ireland
Corporate: New Jersey, USA |
| Key Individuals | Dennis Kozlowski (former CEO)
Mark Swartz (former CFO) |
Tyco International
In 1960, Tyco was founded by Arthur J. Rosenberg as an investment and holding company[1]. Initially, Tyco Laboratories, Inc. focused primarily on high tech products for the commercial sector before undergoing a name change in 1993 to Tyco International. Ltd. to reflect their wide-spreading global presence in the security solutions and fire protection industries[1]. Tyco acted in a large number of acquisitions, peaking in the in the 1990s and early 2000s having spent an estimated $62 billion to purchase more than 1,000 companies[2]. Tyco’s most acquisitive year evolved in 2001, generating a net income of $3.97 billion on total revenues of $36.39 billion[2]. Today, Tyco International Ltd. (now known as Johnson Controls) continues to operate as a global, diversified company that provides essential products and services to consumers in four business segments: Fire & Security, Electronics, Healthcare, and Engineered Products and Services. It owns dozens of companies that construct and produce products ranging from security systems to surgical instruments[3].
Tyco's Corporate Scandal of 2002
Tyco International’s corporate scandal incorporates the issues behind unethical business practice and considers how such problems have the potential to bring down an entire organization[4]. CEO, Dennis Kozlowski participated in multiple questionable financial transactions that were purposely hidden on the company’s financial reports[4]. Kozlowski enlisted the assistance of Tyco’s CFO, Mark Swartz and serval lower ranking employees to help cover up the illegal financial transactions[4]. Throughout the scandal Kozlowski stole upwards of $170 million from Tyco though the use of stock fraud, unauthorized bonuses, and falsified expense accounts. He also acquired $430 million more by selling artificially inflated Tyco stock[5]. As a result of the unethical business practice, both Kozlowski and Swartz were convicted and imprisoned[5].
Unethical Leadership
Dennis Kozlowski used his high position’s power to threaten and persuade both top and bottom ranking employees to involve themselves within the scandal and ensure they were not to ask questions surrounding his questionable and illegal activities[4].
Suspicious Auditing Practice
PricewaterhouseCoopers, the auditing firm responsible for overseeing Tyco’s financial reports was ultimately accused of failing to identify the illegal transactions falsified by Kozlowski. This resulted in the continuation of Kozlowski’s racketeering scheme[4].
Timeline
- Tyco, International was founded in 1960 and established as a research laboratory[6].
- In 1974, Tyco is listed on the New York Stock Exchange[2].
- Dennis Kozlowski is named CEO in 1992, after being employed with Tyco for 15 years[6].
- In 2000, Tyco acquires four large electronic and security businesses, including the world’s largest fire protection company. The fiscal 2000 year ends with revenue exceeding $28 billion and the company’s book value exceeds $141 billion[1].
- Tyco announces their decision to separate into four individual companies in 2002. During this time Tyco reports a net loss of $9.41 billion and Kozlowski is investigated on suspicion of failure to pay sales taxes[2].
- New York Prosecutors charge Dennis Kozlowski and Mark Swartz for numerous counts of grand larceny, securities fraud, and enterprise corruption towards the end of 2002[2].
- In 2003, Tyco attempts to recover and restructure although it involves the divesture of more than 50 business, the termination of over 7,200 jobs and the closure of 219 facilities globally[2].
- On February 10, 2004, Swartz testifies he did not participate in any illegal activity. Kozlowski refuses to take the stand[6].
- The judge declares a mistrial, due to pressure on one of the jurors and prosecutors are set to seek a new trial on April 2, 2004[6].
Key Players
Although components such as, organizational culture affected the events of the Tyco 2002 scandal, leadership was a critical factor that facilitated the occurrence of the unethical practice and illegal activity behind it[4].
CEO: Dennis Kozlowski
Dennis Kozlowski was employed at Tyco in 1975 before gaining top spot at CEO in 1992. Kozlowski resigned from Tyco on June 2, 2002, under pressure from company investigators, the day before the Manhattan district attorney charged him of conspiring to evade over $1 million in sales tax[7]. Failing to pay the sales tax was his attempt to avoid creating formal records that could link him to accounting irregularities[7]. As CEO, Kozlowski used his power to threaten, manipulate, and bribe both top-ranking and lower ranking Tyco employees to involve themselves in his racketeering scheme or to just simply turn a blind eye[4]. An example of this was Kozlowski allegedly having Tyco pay for his lavish, $30 million mansion, which was kept confidential from many members on the board of directors and employees[8]. A member on the board did uncover this information but agreed to keep silent in exchange for financial benefits. Kozlowski used a large portion of his stollen income to purchase homes, cars, and boats, he was reported saying in an interview with N Magazine, “And trophies that I didn’t need, but it was kind of my way of keeping score.” In the same interview Kozlowski said, “When you spend as much time with the company as I did, you don’t know if you’re Tyco when you wake up in the morning or if you’re Dennis.”[9]
CFO: Mark Swartz
Mark Swartz became CFO at Tyco in 1995 and was essentially known as Dennis Kozlowski’s “right-hand man”[10]. He worked closely with Dennis Kozlowski, both inside and outside of the company and easily covered Kozlowski’s theft in Tyco’s accounting books[11]. Similarly to Kozlowski, Swartz preferred to live an extravagant lifestyle and ensured he fulfilled this by stealing Tyco funds. In 1999, Swartz reduced his company loan by $12.5 million, failing to follow due process in the company’s regulations on debt cancellation and claiming it was part of his bonus pay to do so[11]. Swartz also took part in secretly selling back his Tyco stock shares, along with Kozlowski even after declaring to the public that they would refrain from doing so[11]. This scheme earned him a total of $35 million. As CFO, Swartz continuously inflated the financial entries when in reality the stocks were falling fast[11].
Tyco Board of Directors
A key role of each individual board member of any company is to, “Ensure he/she avoid conflicts of interest including operating in the best interest of the organization not in self-interest of the interest of a stakeholder group.[12]” Another role they entrusted with is the responsibility and accountability the guaranteeing that the company’s funds are properly and legally used[12]. Unfortunately, there were multiple members on Tyco’s board of directors that failed to see these obligations through. Throughout Kozlowski’s time as CEO, many directors failed to take the opportunity to examine Tyco’s finances and identify the large amounts of questionable transactions, instead the financial records were overlooked, and Kozlowski was able to continue engaging in unethical activities[4]. Kozlowski also formed relationships with many members of the board, using financial bribes to keep his suspicious activity a secret[13]. He assisted with the buying of a board member’s $2.5 million home using Tyco funds, while another member received $20 million for helping to arrange a confidential acquisition[13].
External Auditing Firm: PricewaterhouseCoopers
As Tyco’s externally hired auditing firm, PricewaterhouseCoopers came under fire after the conviction of Mark Swartz and Dennis Kozlowski[4]. PwC was accused of failing to exercise due diligence when verifying Tyco’s financial reports[4]. Manhattan district attorney’s office questioned whether the accounting firm knew about the $96 million in unauthorized payments for a group of employees including, Kozlowski and Swartz and used methods to hide them[14]. Kozlowski served as chairman of Raytheon Co., which in 2001 was recorded of paying PricewaterhouseCoopers $84 million in fees, only which $4 million contributed to auditing services[14].
Key Stakeholders/ Impact
Employees
Employees were greatly affected by the scandal. The CEO, Dennis Kozlowski terminated the employees without any notice or indication when they were not producing the revenue targets that were set. Additionally, any employee who expressed an opinion in a slightly negatively manner was fired without any hint. An instance was when Kozlowski dismissed an employee named David – a short seller who spoke about Tyco’s acquisition using large reserves.[15]
Investors and Creditors
Investors and creditors were hugely defaulted with the knowledge they were supposed to be aware of. The company had overstated its earnings to make their financial statements more appealing and financially stable in order to attract more investors and creditors.[16]
The shareholders were deprived of any knowledge of the true figures in the financial statements due to the self-interest that the CEO and his team were acting in. The shareholders were completely excluded from any important financial information that was supposed to be disclosed to them.[16]
Board of Directors
The Board at the time of the scandal was not aware of what the executives were doing and what they were hiding. However, it did breach its “fiduciary duty” by not being diligent with their responsibilities and not having their finger on the pulse of what was really going on.[17] They were supposed to be aware if anything that might have looked out of the blue to ensure that the organization was acting the stakeholders’ best interest.[17]
Tyco Management
Due to the actions of Kozlowski and his team, Tyco’s management was accused of doctoring the company’s financial statements without the shareholders’ approval. The members in the management that were involved in this scandal were accused of violating their “fiduciary duty” because they failed to provide authentic and accurate financial information of the company.[16] They had hugely failed in acting in the shareholders and the stakeholders’ best interests.[16]
Internal Auditors
The internal auditors at the time also breached its duty of care to the shareholders by not being aware of what was going on in the company. This led to huge misrepresentations and “misappropriation of funds” over the 5 years.[16]
External Auditors
One of the major external auditors at the time, PricewaterhouseCoopers had not applied the right level of “professional skepticism” to fully disclose the scandal occurrences that were happening.[16] The auditors were aware that Tyco had not complied some of the GAAP policies of appropriate financial reporting standards but did not do enough to investigate what was going on. They had declared an opinion of low risk for material misstatement when there were a lot of more details that were overlooked.[16]
Current Case Status/ Pending Cases
The cases that were filed against the individuals have been settled during the trial proceedings. Due to the establishment of the new Board and the improvement of the organization after the trial, there are no pending cases that need to be resolved.
PricewaterhouseCoopers LLP paid $225 million to settle the shareholder claims for not discovering the $5.8 billion in accounting overstatements. Investors who were defrauded by Tyco from December 1999 till June 2002 were covered by this settlement.[18]
Former CEO Kozlowski and CFO Swartz were found guilty on June 17, 2005 of obtaining bonuses worth more than $120 million without anyone’s knowledge and approval.[19] They were sentenced up to 25 years in prison for grand larceny, falsification of business records, and conspiracy in the accounting scandal.[18] They are also guilty of falsifying Tyco’s financial position to boost their stock price which defaulted several investors.[19]
General Counsel of Tyco, Mark Belnick had a minor role in this scandal and paid a minor price compared to the other guilty defendants. He paid a civil penalty of $100,000 for his role in the scandal.[19]
On January 17, 2014, Kozlowski was released on parole from the prison in New York City.[1] Since the Board of Directors had been replaced, Tyco International has picked itself up well post the scandal and are still going strong today.[19]
Who was responsible for governance failure?
Ultimately, it was joint act of Tyco’s CEO, CFO who were at fault for the constructing and orchestrating of the Tyco 2002 corporate scandal.
As leaders of Tyco, Dennis Kozlowski and Mark Swartz had the responsibility for developing a positive reputation with Tyco’s stakeholders, as well as, attracting investors, customer, and quality management with the use of ethical influence[13]. However, what both of these men promoted was anything but ethical within their working environment. The type of leaderships displayed did not exert a sense of trust but rather a sense of fear[13]. Ethical leaders are prepared to defend their actions based on solid company values and principles, but when Kozlowski and Swartz were questioned, they claimed only that poor judgement was to blame for their actions[13].
Kozlowski and Swartz used their company status to promote toxic culture within Tyco. According to multiple Tyco employees, Kozlowski humiliated those who failed to meet his exceptionally high profit expectations and rewarded those who achieved his inflated financial goals, regardless of how they did so[13]. Kozlowski positioned his close associates (including Swartz) in prominent organizational ranks, this allowed him to ensure they could assist and participate in his unethical and illegal practices[13]. This strategy allowed Swartz to exploit and falsify company financial statements, concealing the ongoing money laundering.
Both executives act of greed and unethical behavior were substantive of fraud taken in forms of theft of company funds, accounting conflicts of interest, bribery, and inappropriate employee discharges[13]. Kozlowski and Swartz’ crimes perpetrated went beyond greed; their actions were intentionally against those they were recruited to lead and protect[13].
Where is the company now?
On January 25th 2016, Tyco merged with Johnson controls to become one company In January 2016, Tyco merged with Johnson Controls to become one company that is now named Johnson Controls International plc. Previously, Johnson Controls was a multi-industrial company and Tyco was a global fire and security provider[20]. The company now has a full range of systems and digital solutions that focusses on building products, technologies, software, and services.
Johnson Controls International plc is an international company that has over 1000 locations around the world, with the merger, the company can avoid U.S taxes on its foreign market operations. George Oliver became the chairman and CEO of Johnson Controls on September 1st, 2017, he has the responsibility for operating and integrating the companies following the 2016 merger.
The company’s main goal is to save lives, improve businesses and protect where people live and work. Johnson Controls International’s current values are to have integrity, lead with honestly and transparency, have a purpose for their decisions, and be customer-driven so that they can creates good relationships. The future is their focus with continuous improvement and to have the company be one team working together. With the strength of both companies merging, the vision is to drive global growth, and increase revenue.
Where are the key players now?
Former CEO: Dennis Kozlowski
Dennis Kozlowski was convicted in 2005 and served six and a half years in prison at Mid-State Correctional Facility, near Utica, for looting $100 million from Tyco during the 2002 scandal[21] . Kozlowski lives in New York City with his new wife and lives a very modest lifestyle [21]. He has paid his debt to society and is entirely free from penal supervision. With new information emerging about the 2002 scandal, such as taken artwork, bonuses, and false records, Kozlowski had to pay $167 million in fines. He is quite open about the 2002 scandal now and often talks openly in interviews about his life in prison, parole, and what his future might look like for him[21].
Former CFO: Mark Swartz
Mark Swartz was sentenced to 8 to 25 years in prison for his participation in the 2002 scandal but was released on parole in 2014. Swartz served his sentence in the Downstate Correctional Facility, which was a maximum-security prison in Fishkill, New York[22]. He was convicted of stealing a $12.5 million loan reduction that he mistook as part of his bonus [23]. Swartz had to pay $72 million in court restitution and fines[24] Swartz struggled a ton mentally being in prison and has opened up about it on many interviews.
Tyco Board of Directors
The board of directors directly related to the scandal have not continued with the company and during the 2016 merger with Johnson Controls International plc new board member have been selected.
External Auditing Firm: PricewaterhouseCoopers
PricewaterhouseCoopers is still in operation after the 2002 scandal but was their reputation and company finances were struggling [25]. The company has updated their practices, such as risk assessment, their tools, and technology, and have focused their attention of ethics and trust of their future customers. They have provided a $7.9 million settlement for their role in the 2002 scandal by providing Tyco with prohibited services. PwC have a vision to build trust in society and solve important problems. They currently have offices in 155 countries with 284,000 employees worldwide [26].
References
- ↑ 1.0 1.1 1.2 1.3 "Tyco International". Wikipedia. Retrieved March 15, 2021.
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 International Directory of Company Histories (2004). "Tyco International Ltd. History". Funding Universe. Retrieved March 15, 2021.
- ↑ PR Newswire (April 17, 2006). "Tyco resolves 2002 investigation with the SEC". ProQuest. Retrieved March 16, 2021.
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Romero, Jonathan (September 18, 2020). "Tyco Corporate Scandal of 2002 (ethics case analysis)". Panmore Institute. Retrieved March 17, 2021.
- ↑ 5.0 5.1 Sorkin, Andrew Ross (September 13, 2002). "2 top Tyco executives charged with $600 million fraud scheme". The New York Times. Retrieved March 18, 2021.
- ↑ 6.0 6.1 6.2 6.3 The Associated Press (April 3, 2004). "Timeline of events in Tyco scandal". The Seattle Times. Retrieved March 19, 2021.
- ↑ 7.0 7.1 Maremont, Mark (August 7, 2002). "Tyco spent millions for benefit of Kozlowski, its former CEO". The Wall Street Journal. Retrieved March 19, 2021.
- ↑ "Top 10 Crooked CEOs". Time. Retrieved March 19, 2021.
- ↑ Percelay, Bruce A. (June 26, 2020). "The rise and fall of Dennis Kozlowski". N Magazine. Retrieved March 19, 2020.
- ↑ Book, Leslie (October 18, 2016). "Tyco CFO Swartz on the hook for tax for million "borrowed"". Forbes. Retrieved March 19, 2021.
- ↑ 11.0 11.1 11.2 11.3 "Mark Swartz Biography, Life, Interesting Facts". Sun Signs. Retrieved March 19, 2021.
- ↑ 12.0 12.1 "Board Roles and Responsibilities". Literacy Basis. Retrieved March 19, 2021.
- ↑ 13.0 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 Thanos, Lori M. (Spring 2015). "Tyco International Ltd. case study: The implications of unethical behaviour". Academic Leadership in Student Research. 3.
- ↑ 14.0 14.1 McLaughlin, Tim (October 1, 2002). "Tyco scandal hits auditor". The Globe and Mail. Retrieved March 19, 2021.
- ↑ Teacher, Law. "Unethical Issues or Legal Issues in Tyco International". Law Teacher. Retrieved March 23, 2021.
- ↑ 16.0 16.1 16.2 16.3 16.4 16.5 16.6 "Ethical Dilemma: A Case study of Tyco International". March 19, 2020. Retrieved March 27, 2021.
|first=missing|last=(help) - ↑ 17.0 17.1 Andrew, Alicia. "Tyco". Retrieved March 23, 2021.
- ↑ 18.0 18.1 "PwC settles Tyco case for $225M". July 6, 2007. Retrieved March 27, 2021.
|first=missing|last=(help) - ↑ 19.0 19.1 19.2 19.3 Obringer, Lee Ann (16 August 2005). "How Cooking the Books Works". Retrieved March 23, 2021.
- ↑ "Johnson Controls and Tyco Merge". Johnson Controls. 2017.
- ↑ 21.0 21.1 21.2 Kaplan, David (March 1st 2015). "Tyco's 'Piggy,' Out of Prison and Living Small". The New York Times. Check date values in:
|date=(help) - ↑ Brooker, Katrina (August 13th 2007). "Murderers and Rapists and Tyco's Mark Swartz". The Business Journals. Check date values in:
|date=(help) - ↑ Book, Leslie (October 18th 2016). "Ex Tyco CFO Swartz on the Hook for Tax For Millions "Borrowed"". Forbes. Check date values in:
|date=(help) - ↑ Staff, Reuters (October 3rd 2013). "Ex-Tyco CFO Mark Swartz granted parole". Reuters. Check date values in:
|date=(help) - ↑ Lacone, Amanda (March 19th 2020). "KPMG, PwC Work to Repair Reputations Following Scandals, Fines". Bloomberg Tax. Check date values in:
|date=(help) - ↑ "About us". PWC. March 26th 2017. Check date values in:
|date=(help)