Fraud-Free Finding Lifts Tyco

Updated from Dec. 30

A report issued late Monday contends that Tyco didn't engage in accounting fraud, despite more than $300 million in accounting errors last year alone.

The long-awaited forensic audit, conducted at Tyco's direction by a high-priced staff led by attorney David Boies, uncovered no evidence that Tyco committed any "systematic or significant" financial fraud that will materially affect its results going forward. Instead, the report laid the profit overstatement at the feet of what it called "aggressive accounting." Investors applauded the finding, sending the stock 10% higher in Tuesday morning trading.

Still, the outcome of the extensive internal investigation -- issued just hours before a promised deadline expired Monday -- lent some support to the loud arguments from Tyco bears who have long challenged the company's accounting and who note that Tyco is still the subject of an inquiry by the Securities and Exchange Commission.

These investors have been skeptical that the turnaround engineered by Tyco's new CEO, Ed Breen, can overcome the excesses of past management, led by ex-chief Dennis Kozlowski. Tyco stock has doubled off its summer low amid a sense in the market that the company's biggest challenges are behind it, and that punishing individuals who oversaw past episodes will enable Tyco to move on to a more fruitful future.

People Problem

The report did nothing to undermine that notion, focusing as it did on the actions of managers who left earlier in 2002 during the company's darkest moments.

"During at least the five years preceding Kozlowski's resignation, Tyco pursued a pattern of aggressive accounting that was intended, within the range of accounting permitted by GAAP [generally accepted accounting principles] to increase current earnings above what they would have been if a more conservative accounting approach had been followed," the report stated.

The report revealed that Tyco overstated past results by more than $382 million. Still, the overstatements were viewed as immaterial by investors who had already digested news that the company's former executives had allegedly looted much more than that sum from Tyco's accounts.