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inflated a closely tracked cash flow measure by $152 million in its fiscal third quarter, according to a report from accounting ace Albert Meyer.

Investors have been keen to see a consistent recovery in cash flows at Tyco, which was built into an unwieldy industrial giant in the '90s by two former executives now facing federal fraud charges. The new CEO, Ed Breen, is attempting to turn the company around, but since he came aboard Tyco has consistently missed earnings estimates. One seeming bright spot under Breen has been a measure of cash flows called free cash flow.

This takes cash flows from operating activities and adjusts it for other cash items. In Tyco's third quarter, which ended June 30, the company said it made $844 million in free cash flow, a number that exceeded company guidance. Indeed, on an earnings conference call, Tyco's CFO, David FitzPatrick, said free cash flow performance was "truly outstanding."

But was it? Accounting sleuth Meyer, head of 2nd Opinion Research in Dallas, believes that the $844 million left out $152 million of cash outflow that was booked in the income statement as an expense. Typically, any cash or noncash items in the income statement get factored into calculations of operating cash flow and, at Tyco, free cash flow.

A Tyco representative didn't return a call seeking comment.

The $152 million was the premium that Tyco had to pay when it bought back some debt securities. It appears Tyco booked that $152 million in its cash flows from financing activities, where it didn't affect free cash flow. The rationale for that may have been that repaying debt is a financing activity. However, the repurchase premium represents future interest payments, not principal. Moreover, interest is an income statement item. Tyco may have booked this in line with accounting rules. But at no point did the company specifically say that the $152 million expense was removed from operating cash flows. If it was, investors were misled, particularly since free cash flows are so closely watched.

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So where was the $152 million backed out of operating cash flows? The company didn't say. But it could have been a line called "working capital and other," which was positive to the tune of $330 million in the quarter. If $152 million was booked as an effective inflow in this line, Tyco's management should have broken it out there, as investors believed the full $330 million cash inflow came from savvy cash management. Indeed, if only half the $330 million came from selling down inventory and similar moves, Breen and his managers are doing a much less effective job at managing working capital than investors perceive. When third-quarter numbers were released,

Detox noted that balance sheet changes could not be used to arrive at cash flow figures.

Meyer called the alleged cash flow maneuvers a "sleight of hand" in his note.

If sleight of hand were used, it would deepen the conviction among some investors that Breen cannot be trusted. His reputation took a big knock after Tyco revealed over $1 billion of accounting issues only a few months after a much-hyped internal accounting review had said most issues had been uncovered.

Tyco's former CEO, Dennis Kozlowksi, and former CFO, Mark Swartz, are charged with looting Tyco.

Meyer was deeply bearish about Tyco when it was run by the two executives and he did pioneering research on the company's acquisition accounting. Meyer first came into the public eye when he revealed that a large Philadelphia-based charity called the Foundation for New Era Philanthropy was no more than a Ponzi scheme.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to