Tyco International

Final Project Milestone 2

ACC 646

SNHU

Jay Black

Tyco International was one of the biggest and most remembered accounting fraud cases of the early 2000’s. The fraud that occurred at Tyco was the misappropriation of assets by the top executives, including the CEO, CFO, and General Counsel. Tyco was founded by Arthur J. Rosenberg in 1960 as an investment and holding company. The company was split into two different sectors: a semiconductor sector and a materials research laboratory. When Tyco was first opened, its focus was on governmental and military research for the United States government (Tyco Background, n.d.). Tyco made several strategic acquisitions throughout its existence, most notably Simplex Technology and Grinnell Fire Protection in the 1970’s. Acquisitions of Thorn Security, Amp Security, and ADT took place in the mid 1990’s, which created an extremely quick growth in the corporation. These acquisitions attributed to Tyco’s success and revenue growth. During this time of acquisitions, Tyco was interested in market expansion as well as revenue growth.

Dennis Kozlowski, who had been the CEO of Tyco since 1992, was the main strategist behind the recent acquisitions. During the acquisitions during the 90’s is when Tyco went through its corporate accounting scandal. Mark Swartz, the CFO, and general counsel Mark Belnick were also associated with this scandal. They were suspected of bilking investors out of millions of dollars that were received by misappropriation of assets which were paid by unauthorized loans and bonuses (Lawyer Shop, 2015).

From 1997 to 2002, only a few years after Kozlowski took over as CEO, he took an aggregate of $270 million dollars from Tyco’s Key Employee Corporate Loan Program (KELP), which was a program that Tyco had to help to encourage employees to invest in Tyco shares (U.S. SEC, 2002). During his tenure as a CEO, he was using these secret loan funds for his personal use, including yachts, fine art, jewelry, a New York luxury apartment, business venture, all of which were unrelated to Tyco. Of the $270 million of the KELP loans, he used $242 million for his personal use.

During this same time, Swartz, the CFO, took out $85 million in KELP loans, using $72 million for personal investments, real estate trusts, and business ventures unrelated to Tyco. Swartz also took $32 million in interest free relocation loans for a yacht and real estate investments (U.S. SEC, 2002).

General counsel, Mark Belnick, took out $14 million in interest-free relocation loans to purchase an apartment in New York City on Central Park West. Belnick was not working at Tyco at the time he was relocating, which was a requirement of the relocation program. In 2002, Belnick took out another relocation loan to purchase a home in Park City, Utah (U.S. SEC, 2002). All of the previous KELP and relocation loans taken out by these three executives were not disclosed to shareholders, even though the federal security laws require disclosure.

Later, in 1999, Swartz recorded a $25 million loan forgiveness and $12.5 million credit in Tyco’s books against Kozlowski’s outstanding KELP balance, which was authorized by Kozlowski (U.S. SEC, 2002). This loan forgiveness and credit was also never disclosed to shareholders and was kept secret.

The next year Kozlowski and Swartz came up with another two programs to benefit so-called special and favored employees. The first program was created to forgive more than $33 million of relocation loans. To make sure this was kept a secret, they promised not to tell anyone. Kozlowski and Swartz directed others to falsify the books and to bury the secret compensation. The second program was in the form of a cash bonus and Tyco stock compensation a few months later, which was also covered up by Kozlowski and Swartz and again directed others to falsify the books to hide their secret.

The pressure seemed to build and they each had to make sure payments were made so their secret compensations could be kept hidden and collusion was definitely a factor and played a large role in the fraudulent activity and kept it going. Kozlowski used his position of trust and authority for his personal benefit and used that to manipulate others in his direct command. He used his authority and paid others off to hope that nothing would be said. Because of Tyco’s rapid growth, I believe their internal controls were obviously lacking. Tyco’s KELP program was not monitored closely enough and was covered