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Report uncovers massive accounting errors at Tyco.

Byline: Steve Pain

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.
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Title Annotation:Business
Publication:The Birmingham Post (England)
Geographic Code:1USA
Date:Jan 1, 2003
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