Two Former Tyco Executives Found Guilty

The past three years have witnessed stunning pecuniary collapses in many companies that were ranked among the most admired companies in America. Sunbeam, Enron, WorldCom, Tyco, and HealthSouth were lauded, imitated, and studied for their stunning performances. Now they ar studied for their failures. What went wrong? How could so much go so wrong? And, the inevitable oppugn, where were the auditors and the accountants as these m unitarytary statements of well- cosmos were released?Tyco International CEO Dennis Kozlowski, cause CFO plant Swartz, and former general counsel Mark Belnick were wholly indicted on charges that Kozlowski and Swartz, among others, stole $one hundred seventy cardinal from the company and pocketing $430 million from the fraudulent sale of Tyco stock. Belnick was charged with coer $14 million in loans to himself. Tycos management fired back as well. It filed a lawsuit against Kozlowski looking to recoup $244 million in succumb and benefits. Tyco, oer th e period among 1964 and 2001, went from a sm alone research sozzled based in New Hampshire to a conglomerate with a bearing in over 100 countries and over 250,000 employees. Between 1991 and 2001, because-CEO Dennis Kozlowski took Tyco from $3 billion in annual sales to $36 billion in 2001 with over 200 achievements at a cost of $60 billion.It was through its bigmouthed acquisition program that Tycos be pushed the envelope. Tyco made its acquisitions look as anaemic as possible. Called spring-loading, the goal was to have the acquired company seem to be a nonperformer in terms of earnings, much below its actual performance. However, if the acquired company then simply performs normally the following year, Tyco enjoys a boost to some(prenominal) its ontogenesis as well as respect for its management ability. Spring-loading is easily polished by, for example, having the acquired company pay all bills for the acquisition, even if that bill is not due, and to a fault pay all other bills, whether they are due and owing. Raychems treasurer displace out the following email when Tyco was acquiring RaychemAt Tycos request, all study Raychem sites give 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 ideal by David Boies, at the direction of Tycos board, complicated an interview with an employee of another Tyco acquisition in which the employee indicates that a Tyco executive asked How high provoke we get these things? How can we justify getting this higher? (Ackroyd & Thompson, 1999). The Boies report indicates that Tyco executives used both incentives and bosom on executives in order to get them to push the envelope on report rules in the acquisition process.The SEC has begun an investigation into Tycos story in its acquisition of U.S. Surgical in 1998. Documents in the cas e 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 final closure, U.S. Surgical took a one- quantify hit of $322 million in miscellaneous charges. Beginning in the last quarter of 2001, Tycos shares began to recede in price as shareh matureers realized the extent of the accounting creativity. By the summer of 2002, when Kozlowski was indicted for sales tax evasion on transactions involving his face-to-face art collection, shareholder trust was dissipated and Tycos shares had fallen 80 percent, from over $50 per share to just above $10.For purposes of examining ethical motive instruction for accountants, auditors, and managers, thither are two common factors in these case studies. First, the financial pictures multicolored of the companies were grossly distorted. Only the level of soph istication in terms of covering fire the true financial condition varies among the companies. Enron used the slightly more nuanced SPEs piece of music WorldCom used the less glitzy sleight of hand in turning nondescript expenses into capital expenses. Sunbeam relied on quantitative materiality standards to evade sleuthing of its management of numbers, and HealthSouth seemed to start with the numbers it wanted for results and work backward.Second, these were similarly companies toilsome 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 competition or the realities of economic cycles. The distortions were a persist of their goals of maintaining an unrealistic pace of earnings growth.In short, individuals in the companies snarl pressure and succumbed to deceit to satisfy increasing demands. These companies and those responsible 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 much(prenominal) large companies with no one raising an effective dissent to halt the juggernauts of creative financial insurance coverage and accounting? That this question must(prenominal) be posed in the wake of such staggering failures in reality 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 works of business in which the curriculum (including ethics courses) is ill-conceived in terms of training ethical leaders.The senior officer mathematical 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 manners following the collapse of Enron and during the period of daily revelations about its activities and the pending congressional hearings. Mr. Baxter all the way 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-st ated role of business. duration the role of business in society and the issues surrounding maximizing shareholder wealth are common topics of coverage in ethics courses and modules in business schools, very diminished in textbooks and mandates from the American Assembly of Collegiate Schools of Business (AACSB) focuses on clean absolutes or bright line meritoriousness ethics such as honesty, fairness, or even monstrous 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, halfway around social 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 the mselves were all self-coloredly involved in union and philanthropic work.Because of the focus of business schools on social responsibility as ethics, many of these officers and, to a large extent, the acculturations of these companies, felt comfortable with deceptions in the reveal 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 salving 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 r esponsibility. Enrons CFO, Andrew Fastow, was beloved in Houstons Jewish community for his fund-raising for the citys proposed final solution museum. He was also involved in the citys art museum and virtually any 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 Capital (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 luxury of rationalization when it came to accounting and financial reporting because, in their minds, they had reached the co nclusion Jeffrey Skilling touted in nearly every interview he gave, which was, We are on the side of angels. The behavior of executives in these companies reflects their grounding in any one of the three currently used mannequins 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 may 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 found in the screens used by social responsibility coronation 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 hi ring and promotion of those with disabilities6. No generation of revenue from weapons production7. Donations and the use 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 dummy up instead an item in the business press. unitary 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, unload with credit reports and neighbor interviews, for prospective CEOs.Ronald Zarrella, Bausch and Lombs chief executive, was found to have shaded the integrity 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 C EOs are getting slammed for hoarding huge bonuses as they put up 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 dust 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 bequeath the types of financial reports and reporting decisions that produced fundamentally unfair and inaccurate portraits of the companies they were auditing? The answer to this question requires exploration of ethics education in both business scho ols and schools of accountancy. While there are voids in that training, there are also germinal works that could be used to help future 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 but to their own organizations, but to the general public. The problem is that the formulation and publication of codes of ethics alone do not guarantee that managers and employees will behave ethically.Moreover, it is unmingled 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 accept 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 establish a reputation of ethical leadership, managers must cleave to a high moral ground and ensure that their actions are sensed 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 dawn line and profits, not integrity and accountability, are core values. Consequently, when employees are approach with an ethical dilemma, the almighty dollar is most likely to rule the day.