The Tyco fraud scandal: executives' illegal loans and corporate oversight failures

Tyco

In the case study on Tyco, the author is discussing the overall scope of the fraud and the way it took place. This is accomplished through establishing a timeline of events that outlines the activities of key perpetrators. During this discussion is when there is a focus on talking about factors that contributed to the situation. These include: how the investigation began, the role of Mark Schwartz, Tyco's board of directors, the key employee loan program and the impact of auditors. The combination of these factors created a situation that allowed Dennis Kozlowski (the CEO) and his key associates, to fleece millions of dollars from the company on a regular basis for their own personal activities. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

How the Investigation Began

The way the investigation of Tyco began, was based upon the Manhattan District Attorney looking into allegations that Dennis Kozlowski had not reported sales tax on the purchase of fine art. This was used to decorate his New York apartment. However, as the investigation expanded, is when this uncovered a much larger fraud. As the CEO and a select group of executives, were taking loans from the company that were used to: purchase property, go on expensive vacations and buy luxury items. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

Tyco's Board of Directors

The independence of board members is what prevented anyone from blowing the whistle on Kozlowski's activities. This is because he had close relationships with many board members. Over the course of time, he was able to encourage these individuals to support company loans to: executives and other board members. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

The Key Employee Loan Program

The Key Employee Loan Program was established in the early 1980's to help employees' pay for taxes related to company stock they owned. This was designed to limit the total amounts of insider selling for tax purposes. As time went by, Swartz used this program to give all employees loans for any reason. This helped Kozlowski and other executives to receive large loans from this program (that were forgiven in the future). ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

The Impact of Auditors

Price Waterhouse Coopers was the auditor of Tyco. When the unauthorized loans were discovered they asked executives about them. but, they did not report their findings to regulators and investors. Instead, this was considered to be an issue of non-material significance (which allowed the fraud to continue). The combination of these factors is showing how the author is discussing the role of the different parties with the fraud. As a result, this is indicating what factors helped to make the scam continue for so long. This is the point that different parties were involved in Kozlowski's activities through: ignoring red flags and providing indirect assistance. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

Questions for Thought

What do you think Kozlowski's motivation for trying to avoid sales taxes on his art purchase was? Explain.

Kozlowski was avoiding sales tax based on greed and arrogance. Greed is from his desire to boost his return on the paintings. If he avoided the sales taxes, this amount will be much higher (leading to greater price appreciation). At the same time, he was arrogant because he was able to get away with the fraud for so long. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

Explain the concept of comingling assets with the Tyco case.

The comingling of assets is when officers and board members will use the cash and property of the company as their own. This makes it more difficult to provide accurate financial reports based on the lack of transparency. Over the course of time, this will cause the company to lose money by not being able to account for spending and other programs. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)

Would it have been possible for the board of directors to see the adjustments taking place in many different programs at Tyco? Explain.

Yes. The reason why, is because several board members had close associations with Kozlowski and one sold him property. This is a sign that they knew what was going on and did not care. As a result, they could have easily seen the discrepancies and quickly dealt with them. ("Tyco," n.d., pp. 389 -- 402) (Farrell, 2011, pp. 442 -- 446)