Tyco International Scandal : Case Analysis

Culture is an observable, powerful force in any organization. “Made up of its members’ shared values, beliefs, symbols, and behaviors, culture guides individual decisions and actions at the unconscious level. As a result, it can have a potent effect on a company’s well-being and success” (One Page, n.d.).

Buntrock did not act alone in this scandal. Many of his upper-level associates had a hand in this fraud. Other key players included: Phillip Rooney (President, COO and CEO for a period of the scandal), James E. Koenig (CFO and Executive VP), Thomas C. Hau (VP and Chief Accounting Officer), Bruce D. Tobecksen (VP of Finance), and Herbert Getz (Senior VP, General Counsel and Secretary). Each member of this scandal greatly profited in some way. Buntrock made over $16.9 million during the scandal. Rooney earned $9.2 million, Koenig over $900,000, Hau reaped over $600,000, Tobecksen over $400,000 and Getz gained $450,000.

The situation began to unfold when the Securities and Exchange Commission was probing into a restatement of the company's stock price. Kozlowski's business practices raised some eyebrows. In 1999, the Securities and Exchange Commission (SEC) initiated an inquiry into Tyco's practices that resulted in a restatement of the company's earnings. In January, 2002, questionable accounting practices came to light. Tyco had forgiven a $19 million, no-interest loan to Kozlowski in 1998 and had paid the CEO's income taxes on the loan. It was found that he company's stock price had been overrated, and that the CEO and CFO had sold 100 million dollars' worth of shares, and then stated to the public that he was holding them, which was a misrepresentation and misled the investors.

A. Belnick, Dennis Kozlowski, and Mark Swartz. They were charged with falsifying business records in order to conceal their questionable tactics in regards to getting loans without obtaining anyone’s approval. The earnings per share was affected negatively by the fraudulent record keeping, and the president of the Fire and Security division, Jerry Boggess, was an accomplice and fired as a result . After avoiding a million dollar tax bill for the purchase of artwork worth $14 million, Dennis Kozlowski was indicted for tax evasion by the DA of New York. Richard Scalzo was responsible for auditing the financials of Tyco. He participated in improper conduct because he did not implement the proper measures within his audit duties as it pertains

Corporate culture influences everyday employee actions – it’s how they interact with customers, each other, and make decisions. If the company culture does not align with the mission statement, it can create an identity crisis of sorts.

The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.

*  People Shape the Culture. Personalities and experiences of employees create the culture of an organization. For example, if most of the people in an organization are very outgoing, the culture is likely to be open and sociable. If many artifacts depicting the company’s history and values are in evidence throughout the company, people value their history and culture. If doors are open, and few closed door meetings are held, the culture is unguarded. If negativity about supervision and the company is widespread and complained about by employees, a culture of negativity, that is difficult to overcome, will take hold.

On March 15, 2005 former CEO of WorldCom, Bernard Ebbers sat in a federal courtroom waiting for the verdict. As the former CEO of WorldCom, Ebbers was accused of being personally responsible for the financial destruction of the communications giant. An internal investigation had uncovered $11 billion dollars in fraudulent accounting practices. Later a second report in 2003 found that during Ebber’s 2001 tenure as CEO, the company had over-reported earnings and understated expenses by an astonishing $74.5 billion dollars (Martin, 2005, para 3). This report included the mismanagement of funds, unethical lending practices among its top executives, and false bookkeeping which led to loss of tens of thousands of its employees.

Question 1 Summarize 1 one page how you would explain Enron’s ethical meltdown: Enron was an energy company founded by Kenneth Lay in 1985 through a merger of vast networks of natural gas lines. Enron specialized in wholesale, natural gas, and electricity, and made its money as a wholesaler between suppliers and customers rather than actually owning any. Enron in fact didn’t own any assets, which made their accounting procedures very unusual. The lack of accounting transparency at Enron allowed the company’s managers to make Enron’s financial performance better than it actually was. The organizational culture at Enron was to blame for it’s ethical meltdown. Enron’s accounting scheme slowly began to erode its ethical practices, which soon led the culture of Enron to become a more aggressive and misleading business practice. Enron reported profits from joint partnerships that were not yet attained in order to keep stock prices up (or make wall street happy). As this was happening employees began to notice the ethics in senior management (leadership) deteriorating, and soon after they to would follow in their footsteps. Senior management thought they were saving their company from financial ruin and though lying was ok if it meant saving the company. Investors would surely sell their stocks if they really knew the situation the

An organization’s culture shapes the attitudes and behaviors of its employees by defining boundaries, providing a sense of identity and stability. It also establishes a standard in regards to what employees should say and do. Culture can be transmitted via stories, rituals, material symbols and language. Culture within an organization is no exception.

Management researchers seem to agree that the things that companies do called "corporate culture" is an intangible concept and hence difficult to define. Among the attempts to define "corporate culture", the following definition is useful as a starting point:- "culture represents an interdependent set of values and ways of behaving that are common in a community and that tend to perpetuate themselves, sometimes over long periods of time" (Kotter and Heskett,1992,141) Peters and Watermann argue that changing a culture cannot be accomplished.

Main character in this fraud is Mr. Dennis Kozlowski, the CEO of Tyco. He misappropriated around $270 million through unauthorized loans, sale of Tyco securities and undisclosed compensation. In order to conceal these amounts, the compensation was incorrectly offset against unrelated gains. This led to violation of GAAP and misrepresented financial statements. For example, $44.6 million of bonuses were offset against gain from IPO of one of Tyco’s subsidiaries. They have also netted the bonuses with gain on disposal of business and gain on sale of common stock. According to ASC 718 Compensation, these and other bonuses should have been disclosed in operating earnings and should have decreased operating income. However, since they were offset against one-time gains, they did not have any impact on operating income. This “hiding” of compensation occurred on several occasions – the expenses were also netted against gain on sale

Since organization culture is the combination of many factors there are several factors that could affect it. Among the internal factors to consider are the company’s approaches to their processes, is the company more into results and profits or product quality and employee’s safety. Management style is another important feature that affects corporate culture micromanage companies tend to have less motivated employees. Technology these days influence organizations at all levels as the company’s approach to technology will go hand on hand with bettering processes. New factor affecting corporate culture these days is the different work arrangements that are needed these days with the implementation of flexing time and tele-working had commuting acceptable. The management approach to work environment, communication style will definite affect organization culture.

WorldCom was once the second largest telecommunication company in the United States. Currently, the company is known for its enormous accounting scandal from 2002, which led to the company filing for bankruptcy protection. WorldCom executives were able to falsify the company’s accounting figures by inflating the company’s assets by almost $13-billion dollars. The fallout after the company filed for bankruptcy led to huge losses for investors, but also for employees and retailers. The scandal is one of the worst corporate accounting crimes in U.S. history, leading to some of its former executives held personally responsible. WorldCom executives instructed accountants to inflate assets by as much as $11 billion dollars, which led to 30,000 in layoffs and a loss of about $180 billion for its investors.

The classic Phrase by Mckinsey organisation, “the culture is how we do things around here” is taken as reference by many great people. It’s true that culture exist in an organisation which influences the work being done and also affects the success or failure of the project.