Two Former Tyco Executives Found Guilty

The past three years have witnessed stunning financial collapses in many companies that were ranked among the most admired companies in America. Sunbeam, Enron, WorldCom, Tyco, and HealthSouth were lauded, imitated, and canvass for their stunning performances. Now they be studied for their failures. What went wrong? How could so much go so wrong? And, the inevitable headway, where were the auditors and the accountants as these financial statements of well-being were released?Tyco external CEO Dennis Kozlowski, origin CFO Mark Swartz, and former general counsel Mark Belnick were all indicted on charges that Kozlowski and Swartz, among others, stole $170 one thousand thousand from the company and pocketing $430 one thousand thousand from the fraudulent sale of Tyco stock. Belnick was charged with hiding $14 million in loans to himself. Tycos centering fired back as well. It filed a lawsuit against Kozlowski looking to subtract $244 million in afford and benefits. Tyco, over th e close betwixt 1964 and 2001, went from a small research unattackable based in New Hampshire to a accumulate with a presence in over 100 countries and over 250,000 employees. Between 1991 and 2001, then-CEO Dennis Kozlowski took Tyco from $3 billion in annual sales to $36 billion in 2001 with over 200 acquisitions at a cost of $60 billion.It was through its expansive acquisition program that Tycos accounting pushed the envelope. Tyco made its acquisitions look as weak as possible. Called spring-loading, the goal was to have the acquired company seem to be a nonperformer in terms of gain, much below its actual performance. However, if the acquired company then evidently performs normally the following year, Tyco enjoys a boost to both its growth as well as respect for its management ability. Spring-loading is easily accomplished by, for example, having the acquired company pay all bills for the acquisition, even if that bill is not due, and also pay all other bills, whether t hey atomic number 18 due and owing. give offchems treasurer sent out the following e-mail when Tyco was acquiring RaychemAt Tycos request, all major Raychem sites will pay all pending payables, whether they are due or not I understand from Ray Raychems CFO that we have agreed to do this, even though we will be spending the money for no tangible benefit either to Raychem or Tyco. A report completed by David Boies, at the direction of Tycos board, included an interview with an employee of another Tyco acquisition in which the employee indicates that a Tyco administrator asked How high can we compress these things? How can we justify getting this higher? (Ackroyd & Thompson, 1999). The Boies report indicates that Tyco executives used both incentives and pressure on executives in order to get them to push the envelope on accounting rules in the acquisition process.The SEC has begun an investigation into Tycos accounting in its acquisition of U.S. Surgical in 1998. Documents in the case include memoranda between Tyco financial executives proposing ways to slow U.S. Surgicals growth between the Tyco acquisition announcement and actual transfers of the assets. The memos refer to their ideas as financial engineering. Just prior to last closure, U.S. Surgical took a one-time hit of $322 million in miscellaneous charges. Beginning in the last quarter of 2001, Tycos shares began to drop in price as shareholders complete the extent of the accounting creativity. By the summer of 2002, when Kozlowski was indicted for sales tax evasion on transactions involving his personal art collection, shareholder trust was dissipated and Tycos shares had locomote 80 percent, from over $50 per share to just above $10.For purposes of examining ethics instruction for accountants, auditors, and managers, thither are two common factors in these case studies. First, the financial pictures painted of the companies were grossly distorted. Only the level of sophistication in terms of ma sking the true financial condition varies among the companies. Enron used the slightly more nuanced SPEs plot of land WorldCom used the less glitzy sleight of hand in turning ordinary expenses into capital expenses. Sunbeam relied on quantitative materiality standards to evade detection of its management of song, and HealthSouth seemed to start with the numbers it wanted for results and work backward.Second, these were also companies trying to maintain exponential growth. There were continuing pledges from their CEOs to keep the double-digit growth going. That pressure to maintain numbers increased with each passing quarter as the economy took a downturn and as their once unique strategies for growth fell victim to rivalry or the realities of economic cycles. The distortions were a function of their goals of maintaining an unrealistic pace of earnings growth.In short, individuals in the companies felt pressure and succumbed to deceit to satisfy increasing demands. These companies and those responsible for(p) for their financial reports were not dabbling in gray areas. The issues in these cases are clear and the conduct plainly wrong. With all the training in ethics and professional responsibility, the question that arises is as follows How could so much go so wrong for so long in such large companies with no one raising an hard-hitting objection to halt the juggernauts of creative financial reporting and accounting? That this question must be posed in the wake of such staggering failures actually provides the answer. The answer is that those who were engaged in the creative and, often, not-so-creative but fraudulent accounting were trained in schools of transaction in which the curriculum (including ethics courses) is misguided in terms of training ethical leaders.The senior officer group of Enron included M.B.A.s who were trained during the financial wizardry era of M.B.A. programs in the 1980s. Mark Schwartz, the CFO of Tyco, held an M.B.A. Jeffrey K. Skilling, the former CEO of Enron, held an M.B.A. from Harvard. Andrew Fastow, then CFO, graduated from the Kellogg School at Northwestern. Clifford Baxter, another member of Enrons senior executive team, graduated from NYUs M.B.A. program. Tragically, Mr. Baxter took his own life following the collapse of Enron and during the period of daily revelations about its activities and the pending Congressional hearings. Mr. Baxter clearly saw the accounting issues within the company because Sherron Watkins, considered the whistleblower in the case, references him in her internal memo as someone who understood the accounting improprieties. Mr. Baxter left the company in the final months prior to its collapse.The M.B.A. curriculum has, since the time of the Milken and Boesky era, trained students in the importance of smoothing out earnings so as to maximize shareholder value, the often-stated role of business. While the role of business in society and the issues surrounding maximizing shar eholder wealth are typical topics of coverage in ethics courses and modules in business schools, very little in textbooks and mandates from the American Assembly of Collegiate Schools of Business (AACSB) focuses on moralistic absolutes or bright line virtue ethics such as honesty, fairness, or even false impressions in financial disclosures. The AACSB guidelines contain no mandates or references to these issues of honesty or training students in resolution of dilemmas involving honesty, disclosure, and false impression.The typical topics for business ethics textbooks, indeed for the literature in the field, center around amicable responsibility, and include a plethora of materials and cases on environmental issues, health and safety issues, sweatshops, diversity, and corporate philanthropy. The officers of all of the companies examined here and the companies themselves were all heavily involved in companionship and philanthropic work.Because of the focus of business schools on so cial responsibility as ethics, many of these officers and, to a large extent, the cultures of these companies, felt comfortable with deceptions in the name of shareholder value because they were accomplishing what they were trained to do in business school and they had ethics derived from their dedication to philanthropy, diversity, and environmentalism. These were all soft companies in the sense that they were not involved in those types of activities that are the targets of environmental protesters or labor activists.These were not companies running sweatshops or producing chemicals. Their perception of being good derived from the definition of good touted and taught by business ethicists in schools of business. The split, in their minds, between right and wrong did not lie along the lines of virtue ethics, but, rather, along the lines of social responsibility. Enrons CFO, Andrew Fastow, was beloved in Houstons Jewish community for his fund-raising for the citys proposed final sol ution museum. He was also involved in the citys art museum and virtually every other philanthropic cause related to the arts in the Houston area.Even those who worked with these officers in community projects and fund-raising had equated social responsibility with ethics, and were consistently shocked when Enrons financial conduct and reports were revealed. All of the companies noted here, as well as Charles Keatings American Continental and Finova detonating device (the 7th-largest bankruptcy in the history of the United States), were widely known for their dedication to philanthropic activity, social responsibility, environmental activism, and dedication to community generosity.The curricula at business schools had permitted them the opulence of rationalization when it came to accounting and financial reporting because, in their minds, they had reached the conclusion Jeffrey Skilling touted in nearly every interview he gave, which was, We are on the side of angels. The demeanor of executives in these companies reflects their grounding in any one of the three currently used sits of business school ethics training (1) the social responsibility model (2) the code model and (3) the stakeholder/normative model.Under the social responsibility model, students are educated in the importance of environmentalism, diversity, human rights, and philanthropy. Included in this approach whitethorn also be extensive discussions of product liability issues. Deficiencies in this approach are characterized in the previous section. The most descriptive list of this approach to ethics is engraft in the burys used by social responsibility investment funds, listed as follows1. The hiring of women and minorities3. Equity interest and ownership of South African operations (this screen is now dated because of the elimination of apartheid)5. No layoffs and the hiring and promotion of those with disabilities6. No generation of revenue from weapons production7. Donations and the u se of economically disadvantaged contractors and suppliers andSo long as stock prices are cranking up, it seems the CEO can be cellophane man for all anyone cares. But CEO divas are still quite an item in the business press. One thing is clear Credibility and character count. Post-Enron, integrity and fair play matter more than the old gung-ho. Press reports about the lack of executive integrity are everywhere. One notable media story exposed the rise of companies conducting extensive background checks, complete with credit reports and neighbor interviews, for prospective CEOs.Ronald Zarrella, Bausch and Lombs chief executive, was found to have shaded the truth about his credentials, saying he had an M.B.A. from New York University. Actually, he left prior to graduating. The board responded by cutting him out of a $1.1 million year-end bonus. Today CEOs are getting slammed for hoarding huge bonuses as they terminate legions of mid-level managers and production workers in the face of recession fears. Dennis Koslowski, CEO of Tyco, siphoned off millions from the firm by granting and forgiving employee relocation loans. He used the wealth for such essentials as a $15,000 umbrella.A guilty plea by one auditor and the criminal conviction of his audit firm have resulted in statutory reform, new policies on financial reporting, and stricter regulatory requirements for audit firms. When all the reform constellate settles, however, and the new statutes, regulations, and rules are implemented, auditors and those who educate them will still be left with the same question why were auditors willing to allow the types of financial reports and reporting decisions that produced basically unfair and inaccurate portraits of the companies they were auditing? The answer to this question requires exploration of ethics education in both business schools and schools of accountancy. While there are voids in that training, there are also seminal works that could be used to help futu re accountants and auditors understand the dilemmas they will face and how to resolve such dilemmas.The Israeli bank-shares fiasco, the Enron affair, and, in its wake now, the WorldCom and Tyco scandals clearly demonstrate that unethical managers are a liability not only to their own organizations, but to the general public. The problem is that the formulation and yield of codes of ethics alone do not guarantee that managers and employees will behave ethically.Moreover, it is evident that managerial ethical behavior has a great deal of puzzle out on the ethical climate and culture of the organization. Walking the talk is the name of the game, managers must not only be familiar with the ethical culture and cause it, but must serve as examples to the rest of the corporation. Any disparity between the declared ideology of the organization and managers behavior has a deleterious effect. To build a reputation of ethical leadership, managers must adhere to a high moral ground and ensu re that their actions are perceived to be ethical.When ethical dilemmas are not confronted and when ethical aspects of daily managerial life are ignored, employees quickly perceive that ethical considerations do not constitute an integral component of the organization. They may rightly observe that bottom line and profits, not integrity and accountability, are core values. Consequently, when employees are faced with an ethical dilemma, the almighty dollar is most presumable to rule the day.