2. TYCO’S ETHICAL BREACH 2
1. Given the corporate ethical breaches in recent times assess whether or not you believe
that the current business and regulatory environment is more conducive to ethical
behavior. Provide support for your answer.
With the corporate ethical breaches that have taken place recently the business and
regulatory environment is taking necessary steps to be more conducive to ethical
behavior. Companies are taking every precaution when recruiting potential employees
and members of management. Recently, companies have been experiencing ethical
breaches concerning falsifying financial reports by failing to report debts owed to
creditors all the way to ethical breaches concerning top officers giving false information
during the hiring process just to meet certain job requirements and retain those positions.
With all of these dishonest practices consumers, creditors and investors are skeptical
when it comes to purchasing products or investing their money into the companies.
Businesses are starting to reiterate their company’s values and integrity by printing them
on large boards in their physical location establishments, on the company website, and
annual reports. The employment process has become even more complicated than the
earlier years. Assessment tests are one of the main changes in the hiring process to ensure
a prospective employee is competent in the required fields and that managers will use
their best judgment in determining which actions will be beneficial to the company and
its overall image. Unlike before some businesses even check credit scores of prospective
employees to see if they are financially responsible in their own lives before they are
allowed to manage finances for very large global companies. The SEC and Sarbanes
3. TYCO’S ETHICAL BREACH 3
Oxley Act have designed regulations that will hold everyone accountable for their actions
if a company is suspected of unethical accounting practices. These laws prevents the top
officers from denying awareness of the malpractice that was being exhibited within the
company and gives really strict guidelines to report any discrepancies. With this in place
it lets creditors and investors know that businesses will operate within the law.
2. Based on your research describe the organization, the accounting ethical breach, and the
impact to the organization related to the ethical breach.
Tyco International Ltd. Is a fire and security protection company that services many
different industries such as gas companies, global retailers, and hospitals. In 2012 the
company became the world’s largest security company. Tyco sells fire detection systems,
sprinkler systems, electronic surveillance systems, and life safety products which consist
of respirators for firefighters and military, thermal imaging cameras and even nurse on
call systems for the hospital.
Tyco’s accounting breach first came to light after five of the company’s top officers
failed to report unauthorized loans that were given to them from corporate funds. One of
these top officers Dennis Kozlowski accepted large undisclosed amounts of money from
the company and used it for his own personal gain. One loan which was given was
supposed to be a relocation loan which Kozlowski used to build his own mansion. Later,
the SEC revealed that two other top officials “. . . willfully helped Mr. Kozlowski take
unauthorized money from Tyco in exchange for an agreement that they, too, could
benefit . . .” (Maremount).
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This ethical breach of the company’s top officers began to discourage other major companies
such as GE reevaluate their plan to invest in the company and also use them for their own
business needs. Stockholders were appalled because the money for the loans was net income that
the company received from services rendered. The SEC filed security fraud charges against the
officers after their own investigation and began to build their case against the men for their
3. Determine how the organizational ethical issue was detected and how management failed
to create an ethical environment.
After some short sellers decided to take a step back from investing in Tyco a lot of
issues were raised. Tyco had already spent at least $33 million in acquisition fees
acquiring new companies. Once the short sellers requested financial documents to
disclose the breakdown of debts owed and revenue generated Tyco denied them access to
those accounts. Questions were being raised once one of the top executives transferred
the title of his home to the company. This executive was from one of the companies that
Tyco acquired, ADT, and was also one of the board members. With Tyco’s inability to
sell CIT there stock numbers jumped up and down. Sometimes right above junk numbers
in stock. Once a lot of different companies began to inquire about Tyco’s financial
practices the company started to take measure to eliminate some of their debt. By
breaking the company down into four different parts all of the financial flaws began to
come to the forefront.
Once the top officers began to make side deals in order to get their own share of
money there was no turning back. The managers failed to create an ethical environment
5. TYCO’S ETHICAL BREACH 5
due to greed. Coming from a company that specializes in life saving products the
management group took advantage of the income that should have been used to give back
to the stockholders or either invested in the company for research in order to ensure
longevity in its market.
4. Analyze the accounts impacted and/or accounting guidelines violated and the resulting
impact of the business operation.
As a result of this breach the amount of money loaned impacted accounting accounts
such as cash on hand, accounts receivable, stockholder’s equity, and dividends payable to
stockholders. This breach caused the company to sell many buildings in their possession,
lay off employees, and sell the company jet. The company also could not borrow any
more money from any lending institutions and stockholders were hoping to gain some
extra money from the sale of Tyco’s equipment, land, and other tangible assets.
5. As a CFO, recommend which measures could have been taken to prevent this ethical
breach and how each measure should be implemented.
As CFO of Tyco International Ltd, I would have made it a priority to hold monthly
meetings to discuss all of the acquisitions that were taken place. Detailed financial reports
would have to be presented to break down the expense and revenue accounts that would
be affected by making such acquisitions. In additions to those meetings the stockholders
would receive a copy of such financial statement to get some of their feedback on the top
officer’s decisions. I know that most stockholders usually do not have that much say in
the actions of the top officers they appointed to fulfill the positions; however, I do not
6. believe that it is a smart move to just invest money into a company and willingly give it
TYCO’S ETHICAL BREACH 6
someone to run it without checking in to see if things are being handled in an ethical
manner. Meetings should have taken place with accounting professionals just to make
sure that they were not persuaded to make any incriminating adjustments to the financial
reports and also remind them that they would be held accountable for their actions if they
were not being honest. After those meetings I would have each professional sign
documents reviewing the meeting that had just taken place. There should have been a
system of checks and balances because once you give a group that small that amount of
power it is hard to keep control of the finances and maintain a positive image for your
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Alex Berenson with Andrew,Ross Sorkin. (2002, Feb 07). Tyco says its earnings will fall short, and
the company backs away from a planned deal. New York Times. Retrieved from
By Mark Maremont and,Laurie P. (2002, Sep 12). Ex-tyco CEO is likely to face charges over
unauthorized pay. Wall Street Journal. Retrieved from
Bray, H. (2002, Jun 14). TYCO TO CUT JOBS, CONSOLIDATE TROUBLED COMPANY IS HOPING TO
SAVE $125M ANNUALLY, TRIM $27B DEBT LOAD TYCO TO SELL BUILDINGS, AIRCRAFT, PAY DEBT.
Boston Globe. Retrieved from
Jeffrey Krasner and, B. H. (2002, Jun 12). TYCO TO PROBE NANTUCKET DEAL $5M KOZLOWSKI
HOME PURCHASE IS PART OF INTERNAL INVESTIGATION. Boston Globe. Retrieved from