Summary
This Form 8-K filed by Tyco International Ltd. (erroneously identified as Johnson Controls International plc in the prompt, but the filing is for Tyco) on December 30, 2002, details the findings of an extensive internal review conducted by Boies, Schiller & Flexner LLP regarding the company's accounting and corporate governance practices. The review, initiated in response to concerns about potential fraud and improper accounting by former senior management, covered the period from 1999 to 2002. While the review did not uncover evidence of systemic or significant fraud that would materially affect future earnings, it identified numerous instances of aggressive accounting, poor documentation, inadequate internal controls, and instances of erroneous accounting entries. Key findings include a pattern of aggressive accounting aimed at increasing reported earnings, often pushing the boundaries of GAAP. The report details specific issues related to revenue recognition, acquisition accounting (both pooling and purchase), the use of reserves, and corporate governance, including employee loans and personal use of corporate assets. Tyco's current management has implemented or is implementing remedial actions, including improving documentation, formalizing approval procedures, reducing reliance on non-recurring charges, strengthening the Board of Directors' oversight, and adopting more neutral accounting policies.
Key Highlights
- 1Extensive internal investigation by Boies, Schiller & Flexner LLP into Tyco's accounting and corporate governance from 1999-2002 found no evidence of systemic or significant fraud materially impacting future earnings.
- 2The review identified a consistent pattern of 'aggressive accounting' by prior management, often used to increase reported earnings, even when compliant with GAAP.
- 3Numerous instances of erroneous accounting entries were discovered and corrected, though none were individually or in aggregate material to the overall financial statements.
- 4Significant findings relate to inadequate documentation, poor internal controls, and instances of improper use of corporate assets and employee loan programs.
- 5Specific issues were identified in revenue recognition practices, acquisition accounting (including pooling and purchase methods), and the establishment and use of reserves.
- 6Tyco's current management has initiated a comprehensive plan to improve accounting practices and corporate governance, focusing on enhanced documentation, formal procedures, and more conservative accounting.
- 7The report notes that prior senior management engaged in abuses of trust and self-dealing, leading to the extensive review.