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Updated from Dec. 30

A report issued late Monday contends that

Tyco

(TYC)

didn't engage in accountingfraud, despite more than $300 million in accounting errors last year alone.

The long-awaited forensic audit, conducted at Tyco's direction by ahigh-priced staff led by attorney David Boies, uncovered no evidence thatTyco committed any "systematic or significant" financial fraud that willmaterially affect its results going forward. Instead, the report laid theprofit 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 -- issuedjust hours before a promised deadline expired Monday -- lent some supportto the loud arguments from Tyco bears who have long challenged thecompany'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 byTyco's new CEO, Ed Breen, can overcome the excesses of past management, ledby ex-chief Dennis Kozlowski. Tyco stock has doubled off its summer lowamid a sense in the market that the company's biggest challenges are behindit, and that punishing individuals who oversaw past episodes will enableTyco to move on to a more fruitful future.

People Problem

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

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"During at least the five years preceding Kozlowski's resignation, Tycopursued a pattern of aggressive accounting that was intended, within therange of accounting permitted by GAAP

generally accepted accountingprinciples to increase current earnings above what they would have been ifa more conservative accounting approach had been followed," the reportstated.

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

All the same, the report failed to clear Tyco entirely. Indeed, itlisted troubling examples of aggressive -- and potentially abusive --accounting tricks that could have misled investors in the past. The reportspecifically cited four episodes:

  • In a 1999 presentation entitled "Acquisition Balance SheetOpportunities," a controller from Tyco's Fire & Safety division urgedemployees to, among other things: "be aggressive in determining exposures;determine reserves with worst-case scenario; have a strong story to tellregarding each reserve; book the reserves on the acquired company'sfinancial system ... and keep the reserve descriptions within theaccounting rules, but stretch the expenditures that go in."
  • A similar presentation about Tyco's 1998 merger with U.S. Surgicalsaid Tyco should recognize $72 million from "financial engineering" in 1999and $52 million in each of the following two years.
  • Another memo issued later that year outlined how U.S. Surgicalcould hit first-year earnings goals through, among other things, $64.6million in financing engineering and over-accruing expenses before closingthe deal.
  • A 1996 document related to an acquisition by Tyco's plasticsunit spells out a similar strategy. It states: "We'll book additional'financial engineering' reserves in July with the objective of having abreak-even month. This way we won't raise any flags with the lenderreporting."

Still, the report stopped well short of declaring such accountingtricks fraudulent. It instead maintained that only former Tyco executives-- already exposed in an earlier report -- are guilty of such wrongdoing.

"In none of the instances of questionable accounting examined, exceptfor the matters discussed in the September 2002 report

alleging looting byKozlowski and others, was there credible evidence of intentional fraud,"the report concluded.

Pinning the Tail

The report did, however, expand on the former abuses allegedly carriedout by Kozlowski and other Tyco employees. For example, it criticizesKozlowski for spending $110,000 for a 13-day stay in a London hotel (thatcomes out to $8,461 a night -- or nearly enough to buy 19 $445 pincushions, like the one revealed in the earlier Boies report). It also shows that other Tyco employees, besides top executives, abused the company's laxinternal loan policies. In addition, it questions the generosity of some ofTyco's bonuses and other perks.

"There were ... undocumented bonuses totaling about $6.7 million, andone instance where a unit vice president approved a bonus for the unit'spresident," the report states. And "three employees who had company carsalso received car allowances."

Boies' report, while extensive, does not conclude the investigation ofTyco's finances. The SEC is also probing thecompany. In doing so, the agency is scrutinizing -- for the first time -- somerequested documents it never received during a previous examination of thecompany.

"A large quantity of documents collected by Tyco and its counsel inconnection with the SEC's document request had not been produced to the SECat the time the SEC closed its inquiry in July 2000," the Boies reportstates. "These documents were produced to the SEC staff on Dec. 20,2002."