07 May WHAT DO YOU THINK KOZLOWSKI’S MOTIVE FOR TRYING TO AVOID SALES TAXES ON HIS ART PURCHASES WAS?
This case study is mainly focused on investigating and unearthing financial troubles that face Tyco as a Company. According to the author, Tyco faces some financial strains that threaten to bring the company down thereby calling for speedy measures to prevent further mismanagement of funds. These financial strains are brought about by poor management of the company which is mainly focused on individual interest rather than the company’s goals and development. In the first and second section of the case study, the author gives us an example of some of major acquisitions of Tyco over the years, and how the company’s resources were mismanaged leading to its drop in capital share (Peter Stanwick, 2008 page 205).
The author pays more attention to one CEO, Dennis Kozlowski who is accused of leading Tyco the wrong path and at some point he is fired for the evasion of sales taxes in the company. However, according to the author the company’s management decides to protect the image Kozlowski, a clear sign which shows that the CEO had still an influence in the company. It is said that Kozlowski had managed Tyco for about ten years, a period in which he was able to own residential houses in high profile cities such as New York and New Hampshire (Alex Berenson, 2002 page.391). Most of these investments that Kozlowski made were believed to be financed by money which was meant to pay Tyco’s taxes.
Kozlowski as a CEO was so corrupt such that he tampered on the evidences against him and also interfered with financial records In order to finance his personal investments. These lead to Tyco as a company accumulating huge debts at the expense of Kozlowski’s failure to pay the company’s taxes from the purchase it made on paintings.
At some point in 2002, the CEO was able to divert funds in the amount $9 million that were meant for purchasing paintings into his real estate investments. In addition to the false purchases Kozlowski shipped empty boxes to New Hampshire a process that was covered up and validated by a Tyco employee. The author also reveals how Kozlowski was so corrupt such that he allowed his wife, Karen Kozlowski to use some of the paintings from the company as samples to be used in some of the apartments that they owned in the Fifth avenue(Alex Berenson, 2002 page.391).
This called for the investigations to be expanded by the prosecutors of Kozlowski in order for them to know if Tyco’s funds were been used appropriately. There were suspicions from the prosecutors that most of Tyco’s funds were been used by Kozlowski to finance some of his personal projects that he had (Peter Stanwick, 2008 page 250). According to the author, the heightened investigations bow fruits because it did not take long before the prosecutors learned that some of the artwork in the fifth avenue apartments had been financed by Tyco’s funds. In addition to this it was also revealed that Kozlowski had used $18 million from Tyco to purchase an apartment in Manhattan.
Question1. What do you think Kozlowski’s motive for trying to avoid sales taxes on his art purchases was?
Answer:- The reasons as to why Kozlowski avoided paying the sales taxes of the paintings he purchased was simply because he wanted to finance some of his projects using Tyco’s funds. From the case study, the author gives us examples of some of the real estates that Kozlowski owned (Alex Berenson, 2002 page.390). It is said that Kozlowski owned residences in New York, New Hampshire, Florida and Nantucket Island.
Kozlowski was so self centered and selfish thereby giving priority to his personal interests rather than propelling the company towards growth. However, the author also reveals to us why such unethical behaviors from Tyco’s executives were tolerated in the company. It is said that Tyco’s policies and procedures were inadequate for the authorization of the employees (Alex Berenson, 2002 page.397, sentence 40). This fact gave executives such as Kozlowski and Swartz a perfect opportunity to exploit the company’s resources wrongly.
Question2. Explain the concept of commingling assets with respect to the Tyco case
Answer: – In June 13, 2002 an investigation was launched by SEC on Tyco’s accounting procedures in order to determine whether the company was using reserve accountings to increase its profitability level. The investigations by SEC proved to pay off when in 30th December 2002 Tyco admitted to artificially inflating its profits over the years. The investigation also revealed Tyco’s corporate culture that allowed executives in the company to bypass accounting rules in order to inflate their departmental results.
The company had also a poor system of documenting its transactions thereby encouraging unethical executives such as Kozlowski and Swartz to carry on with their fraudulent acts. The author gives us examples of improper authorization of employees in Tyco whereby the company granted employees to own company’s cars and also receiving car allowances. This contributed to the company’s problems thereby resulting to the company’s restatement of its financial statements (Alex Berenson, 2002 page.397). The author also reveals how Tyco established a key employee loan program where employees in the company would benefit by borrowing money from Tyco in order to pay for taxes in their stocks.
However, this program was misused by executives such as Kozlowski and Swartz who used the money for personal investments other than for the intended purpose. There were also other employee programs introduced in Tyco which were aimed at benefiting the workers. Such programs included the relocation program and the Tyco bonus program. Nevertheless, some of these programs failed to materialize due to the negative influence of some former executive who ill advised the company’s management in order to fulfill their selfish interest (Alex Berenson, 2002 page.397 sentence, 44).
Question3. Would it have been possible for the board of directors to see the adjustment taking place in the many different programs at Tyco?
Answer: – Adjustment of the different programs in Tyco would have been possible but only after the legal measures had been taken to prevent further misappropriation of funds in the company. The board of directors would first review Tyco’s policies and procedures in order to protect its resources from been misused. It is revealed that Kozlowski and Swartz had so much influence in Tyco such that they caused the company’s chief external auditor, PricewaterhouseCoopers (PWC) to be accused for allegedly conducting unauthorized bonuses and loans (Alex Berenson, 2002 page.399).
This resulted to the company in taking some legal measures whereby the Kozlowski and Swartz are convicted and sentenced to 15 years imprisonment. The two former Tyco executives were also ordered to pay the company $134 million in restitution in order to redeem the company’s tarnished image. This would help the company to restore its misused funds and resources in addition to attracting investors back into the company.
Employees in Tyco were also required to undergo through some ethical training as a way of re-organizing the company and restoring its growth (Alex Berenson, 2002 page 399).
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