Tyco Scandal Of 2002: Creation Of The Sarbanes-Oxley Act

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.

The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act and the Auditing Accountability and Responsibility Act, was signed into law on July 30, 2002, by President George W. Bush as a direct response to the corporate financial scandals of Enron, WorldCom, and Tyco International (Arens & Elders, 2006; King & Case, 2014;Rezaee & Crumbley, 2007). Fraudulent financial activities and substantial audit failures like those of Arthur Andersen and Ernst and Young had destroyed public trust and investor confidence in the accounting profession. The debilitating consequences of these perpetrators and their crimes summoned a massive effort by the government and the accounting profession to fight all forms of corruption through regulatory, legal, auditing, and accounting changes.

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

The New York grand jury indictments - including the charge against the former general counsel, Mark Belnick, 55, who was an investigator in the Senates Iran-contra hearings in 1987 - also accuse Mr. Kozlowski and Mr. Swartz of bribing a Tyco board member and several Tyco employees, apparently to try to keep their scheme secret. The indictment accuses Mr. Kozlowski and Mr. Swartz of enterprise corruption, a charge often used in Mafia prosecutions. The authorities accuse Mr. Kozlowski and Mr. Swartz of stealing $170 million from the company itself and reaping $430 million more by covertly selling Tyco stock while artificially inflating the value of that stock. Prosecutors, as well as the company, contend that Mr. Kozlowski defrauded Tyco by awarding

The Sarbanes-Oxley Act was enacted primarily to address a multitude of corporate scandals. The largest and most infamous scandal was from an energy company named Enron. Enron was the 7th largest company in 2001 and by the end of 2002 it was bankrupt. The company was found to be falsifying the books in order to appear to generate profit. The company fabricated partnerships with multiple non-existent companies to hide their losses and generate fictitious revenue. Enron, however, could not keep the façade from the public eyes.

As before, both companies stock prices went from bad, to worse – eventually becoming de-listed. In addition, both companies lost shareholder equity, reducing the value of the investment for the stakeholders. In WorldCom’s case, about 180 billion dollars was robbed from the pocket of the shareholder.

Lay was not the only executive to be involved in a corporate accounting scandal. “Former WorldCom CEO Bernard Ebbers borrowed” over four hundred million dollars from the company “that had improperly accounted for” nine billion dollars “and was forced into a” 2002 bankruptcy (Hoyle et al., p. 555). Moreover, there were many other large businesses that experienced corporate scandals in 2002, such as Adelphia Communications Corporation, Quest Communications, Tyco International, and others.

Global bribery scandals in the 1970s brought about the first developmental period of codes (Messikomer & Cirka, 2010, p. 57). Later, after the public discomfort towards continuous ethical lapses of major U.S. corporations, the United States Congress enacted the Sarbanes-Oxley Act of 2002 on July 29, 2002. This Act required American companies to reveal whether it has adopted a code of ethics (McCraw, Moffeit, & O’Malley, 2008; Schwartz, 2004). In this Act, the term ‘‘code of ethics’’ referred to written standards that are designed to deter wrongdoing and to promote

Corporate Scandals also known as Accounting Scandals are business scandals that originate from the misstatement of financial reporting by the executives of public companies who are trusted to run these organizations. These misrepresentations happen through overstating revenues, understating expenses, Overstating assets or understating liabilities, use of fictitious and fraudulent transactions and direct falsification of financial statements to give a misleading impression of the companies' financial status. These misrepresentations are sometimes done with the cooperation of officials in other organizations or affiliates.

No petty thieves, Tyco International Ltd. chief executive Dennis Kozlowski and chief financial officer Mark Swartz took over $170 millions in "loans" from the company without the shareholders knowledge. A Securities and Exchange Commission investigation in 2002 also found the pair had made more than $400 million in stock sales without disclosure.

Three years ago, Enron’s collapse revealed how easily a company could hide debt. On June 15, 2005 the SEC used this situation as an argument in their report on off balance sheet arrangements entitled “Report and Recommendations Pursuant to Section 401 of the Sarbanes Oxley Act 2002 on Arrangements with Off Balance sheet Implications, Special Purpose Entities and Transparency of Filings by Issuers (SEC, 2003).The report identifies and describes well known and often criticized balance sheet transactions. The organization had submitted it to the President of the United States, the Committee on Banking, Housing and Urban Affair of the United States and the committee on financial services of the United States House of Representatives. In the paper,

From 1996 to 2006, Tyco violated various federal securities laws by the means of using inopportune accounting methods that involved transactions that had no economic substance; therefore, the overstatement of their financial results by at least one billion dollars had significant effect on statements submitted involving the balance sheet, income statement, and the company cash flow. In addition to the falsely portrayed financial information, Tyco shattered the perception of stakeholders and shareholders

Before going into more details on the scandal Tyco had to face, the company has not always been bad. Tyco International was established publicly in 1964. How Tyco International breaks down is into two segments: security solutions and fire protection. They specialized in these two departments to provide customers with safety. At the time of the scandal, it was a fairly large company with about 69,000 employees in New Jersey with three million employees around the world. The companies wealth and growth comes from about 55 percent outside of North America. This shows Tyco International has a lot of global partners and connections all around the world.

Although the Tyco scandal has been attributed solely to Kozlowski’s character flaws, the industrial conglomerate was also alleged by the Securities and Exchange Commission due to the failed corporate governance and a weak board, and agreed to pay “a $50 million civil penalty to settle allegations the high-tech conglomerate’s prior management violated

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