The American-based conglomerate Tyco International

Ltd. is in deep crisis following a wave of revelations

concerning the corrupt practices of the company and
its top management. Dennis Kozlowski has resigned
as CEO and Tyco stock has plummeted, threatening
the firm with bankruptcy. The collapse of Tyco, one of
the worlds largest corporations, with 240,000
employees, would send shockwaves throughout the
US and global economy.
In many ways the company exemplifies the current
state of American business. Tyco has registered huge
profits over the past decade largely by means of
acquisitions and financial manipulations. Its booming
earnings reports and escalating stock value for much
of the past decade were not the products of growing
productive capacity, but were instead achieved
through accounting tricks and outright fraud. Given
the parasitic character of its economic operations, it
quite naturally promoted the most unscrupulous
elements into the highest ranks of management.
In these respects, Tyco is hardly unique. A string of
corruption scandals has emerged following last years
collapse of Enronfrom the energy industry to
telecommunications, from retail chains to Wall Street
investment bankswhich reveals a systemic growth
of corruption and lawlessness that goes to the
foundations of American capitalism. These scandals
share certain common features: financial
manipulation, accounting fraud, greed and
criminality.
A criminal balance sheet and a balance sheet of crime
In May, Manhattan District Attorney Robert
Morgenthau opened a criminal investigation into the
actions of Kozlowski. The CEO has been accused of
using company funds to purchase millions of dollars
worth of artwork as well as his $18 million apartment
in Manhattan. Apparently, Kozlowski used company
loans for the purchases, allowing him to avoid
paying income tax on the money used. It is unclear
that he ever paid back the loans.

Kozlowski is also accused of fraudulently transporting

$13 million worth of art to Tycos operating
headquarters in New Hampshire, in order to avoid
more than $1 million in New York state and city sales
taxes. Under state law, any purchases for use inside
the state are taxable. Rather than pay the $1 million,
Kozlowski had the artwork, or, in some cases, empty
boxes, sent to New Hampshire, where there is no
sales tax. He then had them sent back on the sly to
his Manhattan apartment.
Kozlowski has pled not guilty and has been released
on $3 million bond. His next hearing is scheduled for
June 26. His lawyer is, appropriately enough, Stephen
Kaufman, who was the lawyer for financier/felon
Michael Milken and hotel magnate/felon Leona
Helmsley. New York prosecutors apparently want to
make an example of Kozlowski, who, if convicted,
could face many years in prison. Sales tax evasion by
the rich, which deprives states of otherwise
collectable funds, is a common phenomenon,
expected to exceed $20 billion in 2003.
The Manhattan prosecutors are now expanding their
investigation to include other company executives,
perhaps leading to an indictment of the company
itself. Questions are being raised as to whether the
firm used its own funds to purchase a house from
director Lord Michael Ashcroft and provided interestfree loans to many of its corporate employees.
The Securities Exchange Commission (SEC), in
addition to joining with New York in the investigation
of tax fraud, has announced it is reopening an
investigation into the companys accounting
practices. The original investigation took place in
1999-2000, with the SEC deciding to take no action. It
looked into accounting practices surrounding the
companys many acquisitions. These included a
practice known as spring-loading, a financial
manipulation in which the pre-acquisition earnings of
the acquired company are underreported, so as to
give the merged company an artificial boost
afterwards.

Most members of the companys board of directors

have benefited personally in one way or another as a
result of Tycos practices. Theoretically, the directors
are supposed to be independent of management,
including the CEO, so they can objectively oversee
the operation of the company. In practice, this is
rarely the case in the American corporation, where
directors are closely integrated with management
and both sides enrich themselves at the expense of
the company and its workers.
In addition to Lord Ashcroft, the board includes
Joshua Berman, a lawyer whose law firm was paid as
much as $2 million annually by Tyco. Bermans pay at
the law firm was linked to the amount of work he
helped bring in from Tyco. Another director recently
received a $10 million payment for help in
engineering an acquisition. Most of the
independents on the board are partially paid in the
form of stock options, thereby tying their interests to
the value of the companys stock.
The next high-level Tyco executive to go may be the
companys chief financial officer, Mark Swartz, who
had close ties to Kozlowski and was a key force in
engineering the companys acquisitions. Swartz
reaped over $170 million in salary and stock options
over the past three years.
Also implicated is Tycos auditor, Pricewaterhouse
Coopers, which signed off on all of the shady
accounting practices. In addition to auditing the
company, PwC received millions of dollars for work
on computer systems, tax services and other work
unrelated to the financial statement audit, presenting
conflict of interest problems.
The rise and decline of a corporate behemoth
Tycos criminal business practices are rooted in the
nature of the company. Its economic activity was not
so much production, as acquisition. In the process of
rising from a medium-sized engineering company to a
giant conglomerate, Tyco, under the leadership of
Kozlowski, absorbed hundreds of companies. Today,
the company makes everything from hospital
supplies to underwater optical cable and security

systems. Kozlowski came to be known as Deal-amonth Dennis.

The companys modus operandi was a modern-day
version of slash and burn: acquiring companies and
cutting costs by downsizing, in order to inflate shortterm revenue. Last year it made plans to lay off more
than 13,000 people and shut down over 240 facilities.
Tyco is not so much a company in the traditional
sense of the word, producing a specific commodity or
service and making profit on that basis. While
Kozlowski dreamt of transforming Tyco into another
General Electric, the company resembled more the
corporate raiders that first proliferated during the
1980s, using leveraged buyouts to make money
through the looting of existing corporations and the
workers employed by them.
While the raiders of the 1980s funded their
acquisitions through the sale of highly speculative
junk bonds (the king of the junk bond market was
Milken), Tyco financed its deals primarily through the
stock market. Debts from acquisitions could be
financed by stock, the price of which would go up
following the deal, allowing for further acquisitions.
This worked quite well for much of the late 1990s and
the early years of this decade, with Tyco stock
achieving a 20 percent annual growth rate, making
the company a darling of Wall Street. In the process,
however, the company accumulated $27 billion
worth of debt.
The objective source of this practice lies in the crisis
of the normal process of profit accumulation.
Beginning particularly in the 1970s, the rate of profit
dropped markedly. Under constant pressure by big
investorsbanks, hedge funds and the liketo
produce high rates of return, companies resorted to
the looting of existing social and corporate assets, as
well as financial manipulation and speculation.
Because the continuation of Tycos business
depended above all else on the value of its stock,
everything was done to keep it high, including
accounting fraud. Illicit practices included spring-

loading as well as the accumulation of a massive

amount of so-called goodwill. Goodwill is used to
cover the difference between the actual value of an
acquired asset and the amount paid for it. It is
supposed to represent the potential value that the
acquisition will create in the course of the further
development of the company.

With its bond rating downgraded to junk or near-junk

grade by the major rating agencies, the company is
no longer able to tap the commercial paper market
and other sources of cheap credit. Thus it is planning
on carrying through an initial public offering of its
financial services arm, CIT Group, in the hope of
earning enough cash to stay solvent.

The process worked something like this: Tyco paid

high prices for acquired companies, and rather than
writing this cost off as an expense, which would have
to be reported to shareholders as a reduction in
earnings, the company created a massive amount of
goodwill (about $35 billion) on its balance sheet.
Since the middle of 2000, Tyco accumulated over $20
billion of goodwill on companies that it acquired for
$24 billion. That is, the actual hard assets of these
companies were less than $4 billion.

It remains to be seen whether the sale will be

successful. According to Rob Plaza, an investment
analyst at Morningstar Inc., if the CIT sale goes badly,
There is a very real risk of a Chapter 11 [bankruptcy]
filing.
A personality appropriate to his role

AOL used similar accounting practices to cover its

acquisition of Time Warner, and was subsequently
forced to write off $54 billion of goodwill, the largest
write-off in corporate history.
Tyco could not indefinitely conceal the fact that it
was not actually making real profits. The collapse of
the stock market over the past two years has
undermined the basis of its operations.
The company issued a series of profit warnings early
in the year. In the aftermath of the Enron collapse,
big investors became more suspicious of aggressive
accounting, and Tyco was one of the first targets.
Investors were also concerned about what was seen
as a blundering management, after a series of
reversals linked to a possible breakup of the
company. From its peak in January 2001 of $62.80,
the stock is now hovering around $13, down about 80
percent on the year. Its shareholders have lost over
$80 billion.
Tyco lived by the stock bubble and now it is dying by
it. Twelve billion dollars of its debt is due in 2003,
about $6 billion in February. With a collapsed stock, it
has no way of financing this debt other than through
the sale of its corporate assets.

Given the parasitic nature of Tycos economic

operations, it is not surprising that the leaders of the
company should manifest the traits of social
parasitism themselves. Certainly, Kozlowski fit this bill
until his resignation earlier in the month.
Kozlowski was born in the rundown industrial city of
Newark, New Jersey, the son of a police investigator.
He worked his way through Seton Hall University and
trained as an accountant, before finding his way to
Tyco. At that time the company had sales measured
in tens of millions, a modest figure compared to what
was to come.
Kozlowski became the personification of the
acquisition mania of the 1990s, and assumed the
qualities necessary for the taskbrutishness,
aggressiveness, and a commitment to the
accumulation of his own personal wealth, above all
else. He was one of the best-paid CEOs of the
decade.
For this he was hailed by the business establishment
as a whole. In January,BusinessWeek named
Kozlowski one of the 25 outstanding managers of the
year. He was featured on the cover of the magazine
in 2001, lauded for being the most aggressive CEO
and for his willingness to test the limits of
acceptable accounting and tax strategies.
Kozlowski made a fortune for himself during the
stock market boom of the 1990s, selling Tyco stock

and devising handsome remuneration packages for

himself. He received more than $40 million in 2001,
and earlier this year was awarded an enormous
compensation deal, even as the stock of the company
fell. During the past four years, Kozlowski brought
home over $450 million in salary, share options and
bonuses. This fueled his collection of racing yachts,
private helicopters, motorcycles and, of course, art.
Given this enormous wealth, the fact that Kozlowski
would conspire to avoid paying a million or so in sales
taxes is an indication of his social outlook. This is a
man who built himself and his company on the basis
of greed and fraud.
Even with his departure, Kozlowski is expected to
benefit with a severance deal worth millions. The
package that Tyco agreed with the CEO in 2001
included a $3.4 million annual pension, in addition to
a $135 million lump-sum payment. The final
agreement is expected to be somewhat less than this
original deal, since Kozlowski resigned rather than
being fired. A golden parachute for departing CEOs
is a common occurrence, even for executives who
have left after destroying their companies.
Tyco is not an isolated corporation, but, like Enron,
has a web of ties to other firms. A recent article in
the Wall Street Journal which had the somewhat
worried title, Tycos Meltdown is Kryptonite for Wall
Streets Superstarsdescribed how many of Wall
Streets big investors, including some of the biggest
hedge funds, have been badly hurt by Tycos
collapsing share prices.
Moreover, other corporations face similar crises with
similar causes, including WorldCom, a company that
was also based largely on acquisitions. Acquisitionfrenzy was at its peak in 2000, when the value of
deals reached $1.8 trillion, more than triple the level
of the mid-1990s. The collapse of some of the biggest
companies that engaged in this practice will have a
cascading effect through the economy as a whole.
Tyco Background
Tyco International has operations in over 100
countries and claims to be the world's largest maker

and servicer of electrical and electronic components;

the largest designer and maker of undersea
telecommunications systems; the larger maker of fire
protection systems and electronic security services;
the largest maker of specialty valves; and a major
player in the disposable medical products, plastics,
and adhesives markets. Since 1986, Tyco has claimed
over 40 major acquisitions as well as many minor
acquisitions.
How the Fraud Happened
According to the Tyco Fraud Information Center, an
internal investigation concluded that there were
accounting errors, but that there was no systematic
fraud problem at Tyco. So, what did happen? Tyco's
former CEO Dennis Koslowski, former CFO Mark
Swartz, and former General Counsel Mark Belnick
were accused of giving themselves interest-free or
very low interest loans (sometimes disguised as
bonuses) that were never approved by the Tyco
board or repaid. Some of these "loans" were part of a
"Key Employee Loan" program the company offered.
They were also accused of selling their company
stock without telling investors, which is a
requirement under SEC rules. Koslowski, Swartz, and
Belnick stole $600 million dollars from Tyco
International through their unapproved bonuses,
loans, and extravagant "company" spending. Rumors
of a $6,000 shower curtain, $2,000 trash can, and a
$2 million dollar birthday party for Koslowski's wife in
Italy are just a few examples of the misuse of
company funds. As many as 40 Tyco executives took
loans that were later "forgiven" as part of Tyco's
loan-forgiveness program, although it was said that
many did not know they were doing anything wrong.
Hush money was also paid to those the company
feared would "rat out" Kozlowski.
Essentially, they concealed their illegal actions by
keeping them out of the accounting books and away
from the eyes of shareholders and board members.
How it Was Discovered
In 1999 the SEC began an investigation after an
analyst reported questionable accounting practices.
This investigation took place from 1999 to 2000 and
centered on accounting practices for the company's
many acquisitions, including a practice known as
"spring-loading." In "spring-loading," the preacquisition earnings of an acquired company are
underreported, giving the merged company the

appearance of an earnings boost afterwards. The

investigation ended with the SEC deciding to take no
action.
In January 2002, the accuracy of Tyco's bookkeeping
and accounting again came under question after a tip
drew attention to a $20 million payment made to
Tyco director Frank Walsh, Jr. That payment was later
explained as a finder's fee for the Tyco acquisition of
CIT. In June 2002, Kozlowski was being investigated
for tax evasion because he failed to pay sales tax on
$13 million in artwork that he had purchased in New
York with company funds. At the same time,
Kozlowski resigned from Tyco "for personal reasons"
and was replaced by John Fort. By September of
2002, all three (Kozlowski, Swartz, and Belnick) were
gone and charges were filed against them for failure
to disclose information on their multimillion dollar
loans to shareholders.

Belnick paid a $100,000 civil penalty for his role. Since

replacing its Board Members and several executives,
Tyco International has remained strong

The SEC asked Kozlowski, Swartz, and Belnick to

restore the funds that they took from Tyco in the
form of undisclosed loans and compensations.
Where Are They Now?
Kozlowski and Swartz were found guilty in 2005 of
taking bonuses worth more than $120 million
without the approval of Tyco's directors, abusing an
employee loan program, and misrepresenting the
company's financial condition to investors to boost
the stock price, while selling $575 million in stock.
Both are serving 8 1/3-to-25-year prison sentences.
Who is Tyco? Tyco Who Can You Trust? Conclusions Founded in 1960 GAAP Violations Laws and Rules Violated Surveillance and
Covert Operations
Interviews
Physical Evidence Search
Seizure and Search of Computers How Would We Investigate the Theft Act? Concealment What Happened to Tyco and the
Perpetrators? Diversified manufacturing and service company A series of subsidiaries Designs,
manufactures and distributes:
Fire & Security Services
Healthcare and Specialty Products
Tyco Capital
Electronics By:Aryl Burkett, Angeline Cadet, Lyn Nette Rahming Opportunities
Pressures
Rationalizations The Fraud Triangle Concealment and Conversion Investigation Key individuals:
Dennis Kozlowski (CEO), Mark Swartz(CFO), and Mark Belnick(Chief Corporate Counsel)
Crimes committed:
Misuse of Employee Loan Program
Financial Statement Fraud
Lack of Disclosure Notes
Foreign Corrupt Practices Act (FCPA) Misconduct The Scandal Red Flags and Symptoms Extravagant Lifestyle
Anomalies

Internal Control Weaknesses FCPA Violations SEC Violations Conversion Documentary Evidence Examination
Audits Public Records Search
Private Source Documents Search
Net Worth Calculation What was done to prevent this from happening again? Timeline and Key Events in Tyco International Scandal
1960
Tyco founded by Arthur J. Rosenberg 1986
Restructures company into 4 segments 1964
Tyco became publicly trading company 1993
Tyco Laboratories changes its name to Tyco International Ltd. 2000
SEC takes no legal action against Tyco 2001
Tyco buys CIT for 9.2 billion with stock and cash 1999
David Tice writes report about accounting issues at Tyco. Leads to investigation by SEC 1992
Dennis Kozlowski becomes CEO of Tyco 1982
Acquires numerous companies and divides companies into 3 business 1960 1980 1985 1990 1994 1998 2000 15

Tyco International Ltd. routinely employed questionable accounting methods to boost its results in recent years,
but the problems weren't large enough to be "material" to the company's overall profits, an internal inquiry into
the company's bookkeeping practices concluded.
Capping a tumultuous year in which three of its former executives and a former director were indicted, Tyco
filed with the Securities and Exchange Commission a 34-page report on the findings of the accounting
examination, which was headed by attorney David Boies. Twenty-five lawyers and 100 accountants spent
65,000 hours analyzing financial information at more than 45 Tyco operating units.
Although cautiously written, the report paints a picture of a corporate culture gone awry, with a mix of lax
controls and poor ethics resulting in "a pattern of aggressive accounting" that was "intended to increase reported
earnings." Among other things, the report provides considerable evidence that the conglomerate habitually
engaged in a practice it had long denied: suppressing the results of acquisition targets just ahead of swallowing
them, to boost its own post-deal profits.
Even so, the company investigators said many of the maneuvers fell within accounting rules and didn't require any
correction. Investigators also found a number of outright accounting "errors," including improperly dipping into reserves
to pay for unrelated expenses and counting current expenses as long-term costs. But the report said these were
relatively minor and didn't amount to a "systemic fraud."

To rectify these errors, Tyco said it would take pretax charges totaling $382.2 million for fiscal 2002, which
ended Sept. 30. Those charges come on top of a host of other write-downs for the just-ended year, and bring the
total loss for the year to $9.41 billion, or $4.73 a share, on revenue of $35.6 billion.

The report also added some new details of excess at a company already known for a $6,000 shower curtain and
$15,000 umbrella stand purchased for former Chief Executive L. Dennis Kozlowski. In one instance that hadn't
been previously reported, Mr. Kozlowski had a Tyco division rent hotel accommodations for him in London,
costing about $110,000 for 13 days. His personal assistant had her apartment in London paid for in 2001 and
2002 by that same division, the report said.
In other examples of loose oversight: A unit vice president approved a bonus for his boss; charitable
contributions were made without authorization, in one case to an entity that didn't even qualify as a charity;
loans were forgiven without clear documentation; and bonus plans were changed in mid-year to loosen their
payout terms.
Despite its relatively benign conclusions, the report amounts to a serious indictment of the company and its
former management team under Mr. Kozlowski, who resigned in June just before being charged with sales-tax
evasion. He and former Chief Financial Officer Mark Swartz were later charged with looting more than $600
million from the company through unauthorized compensation and illicit stock sales. The report will surely
provide fodder for the many class-action cases alleging that investors were misled. Messrs. Kozlowski and
Swartz have pleaded not guilty.
'Best Practices'

Tyco said it is beefing up corporate controls and making other improvements to deal with the deficiencies found
by its investigators. New CEO Edward Breen's goal, the report says, "is to make Tyco's corporate governance
and accounting not only acceptable but best practices."
The conclusions of the report by Boies, Schiller & Flexner LLP likely will cheer investors, who have been
concerned that past bookkeeping abuses could complicate a planned restructuring of Tyco's debt. About $5.8
billion in Tyco borrowings need to be refinanced or repaid in February.
Even so, the report may not end Tyco's accounting woes. The company's bookkeeping also is being examined
by the Securities and Exchange Commission, which among other issues is looking into why a large number of
documents related to an earlier 1999-2000 SEC probe weren't turned over to securities regulators. A person
familiar with the inquiry said that this continuing investigation could result in enforcement action and possible
fines against Tyco.
SEC officials sometimes find accounting problems that elude outside investigators, such as Mr. Boies, who
have been hired by the very companies under scrutiny. Xerox Corp., for example, earlier this year was forced to
pay a $10 million fine and restate its results once again, after the SEC concluded that an internal probe had
vastly understated the amount of misbooked revenue.
In Tyco's case, the Boies team was careful to hedge its conclusions, saying it didn't review every transaction or
accounting decision, and was handicapped by poor documentation and the unavailability of key former
executives. For example, the report examined just 15 major acquisitions, while noting that Tyco bought more
than 700 companies during the period under review.
Officially based in Bermuda, Tyco is a huge conglomerate encompassing everything from fiber-optic networks
to medical supplies to plastic hangers. Although the company has long claimed operating headquarters in New
Hampshire, it is currently being managed from offices in New York.
According to the report, the most problematic of Tyco's divisions was its big Fire and Security unit, particularly
the ADT security-alarm operation. More than half the new 2002 charge -- $217 million -- went to correct ADT
problems, including too-quick recognition of income from fees it charged the network of independent dealers
who sell and install many of the alarm systems.

In addition, the report left unresolved another important ADT accounting issue -- the way it accounts for
cancellations of alarm accounts. The issue was the subject of a page one article in The Wall Street Journal last
month, which said Tyco may be writing off too slowly the accounts purchased from dealers, boosting its profits.
Citing a low "attrition rate" among dealer accounts, Tyco has been writing off the accounts over a 10-year
period, a practice that has been defended by new management. Big money is at stake; Tyco spent more than
$1.3 billion buying accounts from dealers last year.
Rapidly Rising

But the Boies report said the attrition rate among dealer accounts had been rapidly rising, to as high as 18.8% in
October 2002, double the rate in fiscal 1999. Citing what it called "uncertainty" in the 10-year calculation, Tyco
said it will monitor the issue in the next year to determine "whether a write-off or write-down is appropriate in
the future."
Critics have long accused Tyco of deliberately suppressing the results of its acquisition targets in the months
before they get folded into Tyco, in some cases by creating overly large reserves, thus inflating the parent
company's post-deal results. Although prior management vehemently denied the practice, the Boies report
provides ample evidence that it was routine.
In one 1999 presentation to operating managers, a Tyco accounting official advised them to "be aggressive" in
setting up reserves" and "create stories" to back the moves. One version of the document, the report said,
included handwritten notes saying "Be careful, I wouldn't want this to get out," and "I would strongly
recommend NEVER to put this in writing."
Other internal documents cited in the report called the practice "financial engineering," with one estimating that
Tyco could "recognize" $176 million over three years from such manipulation involving the $3.17 billion
purchase of U.S. Surgical Corp. in early fiscal 1999.
The Boies report said none of the problems it found would materially affect Tyco's reported revenue or earnings
in 2003 and thereafter. However, left unstated was an obvious conclusion: Tyco's results for at least the past
five years have been artificially boosted by questionable accounting. If the company's new management sticks
to its pledge to clean house and adopt conservative accounting, investors should expect much lower margins
and earnings for the foreseeable future.
In most cases, the Boies report concluded that the deal-related accounting was aggressive, not wrong. Just
before being acquired by Tyco, for example, U.S. Surgical took a $132 million charge for grants, treated as
expenses, that it intended to give hospitals and universities over the next five years. The charge, the Boies report
said, "had the effect of accelerating expenses just prior to the merger" and boosting earnings after it. The report
merely said that the "stated business purpose was to alleviate concerns" of recipients that the grants could be
eliminated after the merger.
The Boies report also addressed what it called "questions" involved in the 1998 purchase of Sherwood, another
health-care concern. In putting the new unit on its books, Tyco assigned a value of just $20 million to
Sherwood's Angio Seal division. But a year later, it sold that division for eight times that amount, indicating that
the earlier valuation may have been set artificially low. The Angio Seal sale resulted in a recorded gain of $111
million. But, citing among other things an "independent valuation" of Angio Seal done at the time of Tyco's
purchase of Sherwood, the report concluded there was "not sufficient basis to revise the accounting treatment."
The report also found that Tyco executives, on occasion, set up reserves in acquisitions, then later reversed them
"for the purpose of making [earnings] targets." It identified $41.4 million in such reversals from 1997 to 2001 in
the 15 acquisitions that were closely scrutinized; the report didn't address any reversals of reserves set up in the
hundreds of other Tyco deals.

In Tyco's annual report also filed Monday, the company obtained an unqualified opinion from its outside auditor,
PricewaterhouseCoopers LLP. Some investors had worried that the auditing firm mightn't give Tyco's books a clean bill
of health.

Scandal-hit Tyco International, parent to a number of West Midlands subsidiaries, has denied its previous management
was guilty of fraud, but yesterday admitted that an internal investigation had uncovered pounds 238 million in accounting
errors.
The Bermuda-based conglomerate, battered by accounting worries, said the errors did not represent significant or
systemic fraud, but added executives had used aggressive book-keeping to boost results.
The results confirmed some of the suspicions that have been dogging Tyco since 1999.
Tyco, which in the Midlands owns Dudley-based How Fire, JW Singer & Sons, IMI's former safety flow control systems
business, and UK steel tube production, said it kept shoddy records and had inadequate corporate governance policies
during the reign of indicted former chairman Dennis Kozlowski.
In fact, Mr Kozlowski's personal assistant authorised restricted stock awards and investigators found internal memos
using terms such as 'financial engineering' in discussions on how to meet profit goals.
To correct the accounting errors, Tyco said it would take pretax charges totalling pounds 238 million in the 2002 fiscal
year, which ended on September 30.
Of that amount, more than half stemmed from Tyco's ADT burglar alarm business, which had recognised income too soon
from fees it charged a network of independent security systems dealers.
Tyco chief executive Edward Breen, chief financial officer David FitzPatrick and outside auditor PricewaterhouseCoopers
signed off the company's fiscal 2002 financial statements, says the annual report.
Aggressive accounting is not necessarily improper. But the Tyco investigation concluded that the firm's former
management was not neutral in its treatment of accounting policies. It sought out techniques that would boost profits while
shying away from those that would reduce them, the report said.
Specifically, the report said management had manipulated its accounting for acquisitions to boost financial results.
This long-running criticism of the conglomerate was central to an earlier probe by the Securities and Exchange
Commission, which ended in July, 2000, with the body taking no action.
The SEC began another investigation into Tyco's accounting this year. No results have been reported. As part of Tyco's
internal accounting investigation, Tyco reviewed 15 acquisitions valued at about pounds 18.75 billion at the suggestion of
the SEC. Tyco said it completed more than 700 acquisitions between 1999 and 2001.
The report questioned accounting in the acquisitions of electronics companies AMP and Raychem and health care
company US Surgical. Tyco boosted earnings in the companies it was acquiring by artificially reducing revenue or
increasing expenses in the quarter immediately before the deal closed. The effect was that earnings were enhanced after
the acquisition.
One example showed that Tyco understated by pounds 146.8 million the value of equity and employee stock options it
issued to acquire medical product maker Mallinckrodt in 2000. This meant a pounds 3.5 million overstatement in fiscal
2001 earnings because of the related goodwill. 'There were also instances where senior management exerted pressure
and provided incentives which had the purpose and effect of encouraging unit and segment officers to achieve higher

earnings, including in some cases by their choice of accounting treatments,' it said.

Tyco said pounds 116 million of the pounds 238 million in errors for fiscal 2002were a result of miscalculation of
reimbursements to dealers of its ADT burglar alarms.
It has forecast a funding gap of pounds 2.25 billion at the end of 2003 as it works to secure new bank financing.
Mr Breen said he was confident the company would strike a new financing deal with a group of banks to head off a cash
crunch.
Earlier this year, Tyco hired lawyer David Boies, who prosecuted the US Justice Department's antitrust case against
Microsoft during the Clinton administration, to conduct an internal investigation.
Mr Boies and an army of forensic accountants stepped in as New York City prosecutors investigated Mr Kozlowski and his
top lieutenant, former finance chief Mark Swartz.
The men are accused of orchestrating a corruption scheme that netted them more than pounds 375 million through
unauthorised compensation and fraudulent stock transactions. Both men have pleaded not guilty to the charges