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Tyco Discloses Tricky Methods of Accounting

Dec 31, 2002 | Bloomberg News

Tyco International, whose former chief executive officer was indicted for tax evasion, used bookkeeping gimmicks to inflate results during an acquisition spree in the 1990s, according to an internal accounting review.

Tyco will take $382.2 million in charges to adjust for accounting errors in fiscal 2002 and prior years. Tyco, the largest maker of industrial valves and electrical connectors, also said it began handing over new documents related to a Securities and Exchange Commission probe of its acquisitions from 1999 and 2000 that was reopened earlier this year.

The company "engaged in a pattern of aggressive accounting which, even when in accordance with Generally Accepted Accounting Principles, was intended to increase reported earnings" above more conservative estimates, the report said. Former CEO Dennis Kozlowski built Tyco into the biggest maker of undersea fiber-optic cable, as well as valves and connectors, through more than $64 billion in acquisitions that are now under scrutiny.

"From a negotiating posture, at this juncture the New York District Attorney and the SEC have all the cards," said former prosecutor and SEC enforcement attorney Jacob Frenkel. "Internal investigative reports like this are the opportunity for the company to show its hand and convey that they are playing a fair game."

Tyco disclosed in its annual report filed yesterday for the year ended Sept. 30 that it received subpoenas from the SEC, the New York County District Attorney and the U.S. Attorney for the District of New Hampshire, which prosecutes criminal matters.

Lawyer David Boies of the law firm Boies Schiller & Flexner, conducted the review along with auditor PricewaterhouseCoopers. Boies conducted an earlier Tyco probe into fraud and theft by former executives.

The company, now led by Edward Breen, has sued former executives including Kozlowski. Breen has been trying to improve governance and rebuild trust at the conglomerate.

"We probably would have heard something earlier if there was a problem," said Matt Brown, vice president of equity research at Wilmington Trust, which had 518,416 Tyco shares in September.

In some cases, profits at companies that Tyco was in the process of acquiring tumbled just before the purchase was completed, the review found. They rebounded from the depressed level as soon as the acquisition was finished.

The pattern raised the issue "as to whether the acquired entity's pre-merger financials had been improperly manipulated in order to increase reported earnings subsequent to the consummation of the acquisition," the report said.

After Tyco agreed to buy Raychem in May 1999, Raychem management told employees to "hold back shipments and pay all bills received whether due or not, prior to the consummation of the acquisition," the report said. In the quarter before Tyco completed its $3.17 billion purchase of U.S. Surgical in 1998, revenue tumbled 33 percent from the prior quarter, only to jump 47 percent in the first quarter after.

SEC spokesman John Heine declined comment on Tyco's filing and on the agency's investigation.

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