Updated from Dec. 30A report issued late Monday contends that Tyco ( TYC) 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 ProblemThe 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
All the same, the report failed to clear Tyco entirely. Indeed, it listed troubling examples of aggressive -- and potentially abusive -- accounting tricks that could have misled investors in the past. The report specifically cited four episodes:
alleging looting by Kozlowski and others , was there credible evidence of intentional fraud," the report concluded.
- In a 1999 presentation entitled "Acquisition Balance Sheet Opportunities," a controller from Tyco's Fire & Safety division urged employees to, among other things: "be aggressive in determining exposures; determine reserves with worst-case scenario; have a strong story to tell regarding each reserve; book the reserves on the acquired company's financial system ...