Accounting & Tax

Tyco to Pay $50 Million to Settle with SEC

Series of illegal accounting practices enabled the conglomerate to overstate profits by at least $1 billion, the commission asserts.
Stephen TaubApril 17, 2006

Tyco International agreed to pay $50 million to settle civil charges with the Securities and Exchange Commission for engaging in a series of illegal accounting practices that enabled it to overstate profits by at least $1 billion.

“This enforcement action shows that, in addition to looting the company, Tyco’s Kozlowski-era management lied about the company’s financial results,” said Linda Chatman Thomsen, the SEC’s director of enforcement, in a statement. “Tyco benefited from this fraud, as the penalty in this case reflects.”

The commission alleged that Tyco inflated its operating income by at least $500 million by undervaluing acquired assets, overvaluing acquired liabilities, and misusing various kinds of reserves to make adjustments at the end of reporting periods, which the conglomerate employed to enhance and smooth its publicly reported results and to meet earnings forecasts.

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The SEC asserted that Tyco inflated operating income by $567 million between fiscal year 1998 through the fiscal quarter ended December 31, 2002, using connection fees that the company’s ADT Security Services subsidiary charged to dealers from whom it purchased security monitoring contracts. Because the connection fee was fully offset by a simultaneous increase in the purchase price ADT allocated to the dealers’ security monitoring contracts, the commission alleged, the connection fee transaction lacked economic substance and should not have been recorded in Tyco’s income statement.

In 2003, noted SEC noted, Tyco restated operating income and cash flow relating to the connection fees.

The SEC also alleged that from September 1996 through early 2002, Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related-party transactions of its former senior management. Tyco also was charged with improper accounting for certain executive bonuses it paid in fiscal 2000 and 2001, thus excluding from its operating expenses the costs associated with those bonuses.

The regulator further alleges that Tyco violated the anti-bribery provisions of the Foreign Corrupt Practices Act when employees or agents of its Earth Tech Brasil subsidiary made payments to Brazilian officials for the purpose of obtaining or retaining business for Tyco.

The civil penalty was preliminarily negotiated last year, noted the SEC. In addition, Tyco, without admitting or denying the allegations, consented to the entry of a final judgment permanently enjoining it from violating the antifraud, proxy disclosure, periodic reporting, corporate recordkeeping, and anti-bribery provisions of the federal securities laws.