Failure_Within_Tyco

Failure within a Large Organization – Tyco International Ltd. Tyco International Ltd.(Tyco) originally founded in 1960 as a laboratory after going public in 1964 the company rapidly acquired other companies. Tyco continued to grow acquiring other businesses, eventually Tyco’s stock was listed in the New York Stock Exchange. Tyco International grew into a multinational company in 1986 when it divided its subsidiaries into Electrical and Electrical Components, Healthcare, and Specialty Products, Fire and Security Services and Flow Control. Tyco’s growth into already existing operations gave them a leading market share in all of the four sectors (tyco.com). The purpose of this paper is to examine how organizational behaviors theories could explain the failures of executive management. The Tyco Company The 2002 Tyco corruption scandal involved four top executives; L. Dennis Kozlowski, CEO, Mark Swartz, CFO, Frank E. Walsh Jr. Director and Tyco Board Member, Mark Belnik, Chief Corporate Counsel and Executive Vice President. Tyco International was based in Bermuda with annual revenues of approximately $36 billion at the time of the fraud scandal employing over 250,000 employees in over 100 countries (Maremont & Cohen, 2002). They were a leading conglomerate in the world with one of the largest paid CEO’s, Dennis Kozlowski in the world (Maremont, 2003). Unethical Practices – Fraud The Tyco International fraud scandal first came to light in 1999, but in 2002 the news broke publicly when the Securities and Exchange Commissions filed an investigation against Tyco and their executives. The investigation was prompted by many red flags including the incorporation of the company in Bermuda to avoid paying taxes. Ultimately Tyco International violated Federal Securities laws by overstating their financials by approximately one billion dollars, smoothing the reported earnings, hiding sizeable amounts of executive compensation and large amount of transactions from investors (SEC Litigation Release No. 17722 2002). It was recognized that at least $500 million of Tyco’s inflated operating income came from improper accounting practices regarding their acquisitions. In Addition, Tyco failed to disclose vast amount senior executive compensation, and disclosure of the low interest loans, Key Employee Corporate Loan (KELP). They also failed to disclose related transactions of their Chief Executive Officer (CEO) L. Dennis Kozlowski (Kozlowski), Chief Corporate Counsel Mark A. Belnik (Belnik) and Chief Financial Officer (CFO) Mark H. Swartz (Swartz) (SEC Litigation Release No. 17722 2002). Tyco deliberately did not account for certain executive bonuses from operating expenses. Ultimately Tyco violated all areas of the federal securities law. Kozlowski was the master-mind behind the many fraudulent activities. The KELP loans were favorable to employees due to their low interest and so Kozlowski and Swartz took advantage of them other than the actual purpose intended. Kozlowski used the majority of the loans to purchase expensive art, jewelry, homes, and other luxury items. Kozlowski and Swartz too advantage of the relocation loans as they were given without interest, using the loans to purchase homes not related to relocations. KELP loans were re-classed into relocation loans to hide the stated reason of the loans. It is clear there were many fraudulent activities at Tyco International throughout the years leading up to 2002. The executives could do whatever they choose to do no questions asked. Organizational Behaviors – Unethical Behavior Consequently Kozlowski, Swartz, and the other executives exhibited unethical practices, committing fraud on behalf of the company adjusting the financial statements to look better than it is. Similarly a person commits fraud against the company by stealing from the company. In the case on these top executives they committed employee embezzlement and management fraud. The victims were all those who relied on the integrity of the financial statements, such as stockholders, investors, and stakeholders. Because management have the highest authority within the company, it is difficult for others in the corporate ladder to inform on them (Yukl, 2006). As a result, management fraud is more difficult to detect than employee fraud. The reason for this is that internal controls do not always account for the activities of the executives of the company. Therefore, management decisions can supersede or ignore controls that other employees cannot. Consequently senior executives can easily falsify accounting records. There was an evident of perceived pressure and opportunity among the executives at Tyco. The perceived pressure was financially driven by greed and the desire to live beyond their means (Albrecht, 2006). Perceived opportunity is the ability to commit, easily concealing or avoiding punishment. Internal controls are established to prevent unethical practices such as fraud. The five elements of internal controls, control environment, risk management, control activities information and communication and monitoring was controlled and ignored by the management of Tyco (Albrecht, 2006). In the case of these executives at Tyco, they were the pillars of the company and they decided to circumvent these controls. Essentially creating rules or core values for the rest of the organization to follow, but changing these rules as they go along to fit their needs. It is clear that the for internal control to be effective is a good control environment. To establish a controlled environment management must set a good example. Organization Structure Also important is to establish a well defined organization structure, an effective internal audit department would have been necessary to oversee and prevent the fraudulent activities present at Tyco. Obviously Tyco centralized their power at their strategic apex. The greater external control of the organization, the more centralized and formalized its structure (Mintzberg, lampel, Quin & Ghoshal, 2006) Conclusion The executives of Tyco International falsify accounting records, inflating operating income so as to increase the value of their stock prices. Although the main culprit is Kozlowski, other top executives, board members, other personnel and the auditors encouraged these unethical behaviors. The major conflicts of interest, lack of controls was evident. The poorly constructed corporate governance and the deliberate action to avoid corporate policies and federal guidelines was overtaken by greed. References: Albrecht, Steve W., (2006) Fraud Examination, 3rd ed. Thomason South Western. Mintzberg,Henry lampel,Joseph Quinn James B. & Ghoshal, Sumatra, (2006) The Strategy Process Concepts. Prentice Hall Yukl, G. (2006). Leadership in Organizations (6th ed.). Upper Saddle, NJ: Prentice Hall Cohen,Laurie P. and Maremont, Mark, Wall Street Journal, Oct 14, 2002. pg. A.6, Pricewaterhouse Adds Auditors To Tyco Account, New York, N.Y. Maremont, Mark, Wall Street Journal, Oct 03, 2002. pg. C.1, Tyco Special Bonus on Trial; New York, N.Y. http://www.sec.gov/news/press/2002-110.htm http://www.tyco.com