Investors and markets are not always jittery for no reason. There were some Tyco accounting issues that centered on its acquisitions and its accounting for those acquisitions. \({ }^{569}\) What caused investors to seize upon Tyco's financials was that it seemed to be heavily in debt despite the fact that it was reporting oodles of cash flow. \({ }^{570}\) This financial picture resulted because of Tyco's accounting for its "goodwill." When one company acquires another company, it must include the assets acquired in its balance sheet. The acquirer is in charge of establishing the value for the assets acquired. From 1998 to 2001, Tyco spent \(\$ 30\) billion on acquisitions and attributed \(\$ 30\) billion to goodwill.

The problem lies in the fact that the assets that were acquired were not carried on Tyco's books with any significant value. Assets, under accounting rules, lose their value over time. Goodwill stays the same in perpetuity. However, if Tyco turns around and sells the assets it has acquired and booked at virtually zero value, the profit that it makes is reflected in the income of the company. The only way an investor in Tyco would be able to tell what has really happened in the accounting for an acquisition would be for the investor to have access to the balance sheets of the acquired companies, so that he or she could see the value of the assets as they were carried on the books of the acquired company. The bump to earnings from the sale of the assets is lovely, but the bump to profits, with no offsetting costs, is tremendous.

There were additional accounting issues related to the Tyco acquisitions. One big one was that despite having made 700 acquisitions between 1998 and 2001 for about \(\$ 8\) billion, Tyco never disclosed the acquisitions to the public. \({ }^{572}\) The eventual disclosure of the phenomenal number of acquisitions not only explained the lack of cash but caused the realization in investors that they had been deprived of the chance to determine how much of Tyco's growth was due to acquisitions versus running existing businesses.

The nondisclosure of the acquisitions also helped with another accounting strategy. When Tyco made acquisitions, its goal was always to make the company acquired look as much like a "dog" as possible. Tyco was a spring-loader extraordinaire.

In addition to his salary, Mr. Kozlowski was a spender. There were extensive personal expenses documented that began to percolate before problems at Tyco emerged. Tyco's outside legal counsel raised concerns about payments Tyco was making to Mr. Kozlowski's then-mistress (and now Kozlowski's second ex-wife), Karen Mayo, and advised that they be disclosed in SEC documents. Employees in Tyco refused to make the disclosures and continued making the payments. \({ }^{582}\) The e-mail from partner Lewis Liman at Wilmer Cutler, sent March 23, 2000, to Tyco's general counsel, Mark Belnick, read, "There are payments to a woman whom the folks in finance describe as Dennis's girlfriend. I do not know Dennis's situation, but this is an embarrassing fact." \({ }^{253}\)
Before Tyco took its dive, Mr. Kozlowski had accumulated three Harleys; a 130 -foot sailing yacht; a private plane; and homes in New York City (including a 13-room Fifth Avenue apartment, purchased in 2000), \({ }_{5}^{584}\) New Hampshire, Nantucket, and Boca Raton (15,000 square feet, purchased in 2001); and he was a part owner of the New Jersey Nets and the New Jersey Devils. \({ }^{585}\) His Fifth Avenue apartment cost \(\$ 16.8\) million to buy and \(\$ 3\) million in renovations, and he spent \(\$ 11\) million on furnishings. \({ }^{586}\) The items were delineated in the press, and the following purchases for the apartment were charged to Tyco: \(\$ 6,000\) for a shower curtain; \(\$ 15,000\) for a dog umbrella stand; \(\$ 6,300\) for a sewing basket; \(\$ 17,100\) for a traveling toilette box; \(\$ 2,200\) for a gilt metal wastebasket; \(\$ 2,900\) for coat hangers; \(\$ 5,960\) for two sets of sheets; \(\$ 1,650\) for a notebook; and \(\$ 445\) for a pincushion. \({ }^{587}\)
For his then-new wife Karen Mayo's fortieth birthday, Kozlowski flew Jimmy Buffett and dozens of Karen's friends to a villa outside Sardinia for a multiday birthday celebration. \({ }^{588}\) A memo on the party was attached as an exhibit to Tyco's 8-K, filed on September 17, 2002. The process for receiving the guests and the party schedule are described in detail, right down to what type of music was playing and at what level. The waiters were dressed in Roman togas, and there was an ice sculpture of David through which the vodka flowed. The memo includes a guest list and space for the crew of the yacht that the Kozlowskis sailed to Sardinia. \({ }^{589}\) The total cost for the party was \(\$ 2.1\) million. \({ }^{590}\) Tyco also paid Mr. Kozlowski's American Express bill, which was \(\$ 80,000\) for one month. A later report uncovered a \(\$ 110,000\) bill Tyco paid for a 13-day stay by Mr. Kozlowski at a London hotel. \({ }^{591}\) Ironically, Mr. Kozlowski told a BusinessWeek reporter in 2001, on a tour of Tyco's humble Exeter, New Hampshire, offices, "We don't believe in perks, not even executive parking spots........................

Discussion Questions 1. Recall your readings from Unit 2 on the relationship between ethics and economics. How did Tyco's initial problems establish this connection as a very real one for the U.S. markets? What made Tyco's stock price fall initially? Evaluate this comment from a market observer: "When a CEO steps down for (alleged) tax evasion, it sends the message that all of Corporate America is crooked."642 "It makes you think, 'Why did he do it? Is there another shoe to drop?"'643 2. Warren Rudman, former U.S. senator and a member of the board at Raytheon, who knew and worked with Mark Belnick, was astonished at Mr. Belnick's indictment when it was issued. Mr. Rudman said, when told of Mr. Belnick's fall from grace: "I don't understand. Ethical, straight, cross the t's, dot the i's-that's my experience with Mark Belnick." \({ }^{544}\) Mr. Belnick was acquitted of all charges after a jury trial in the summer of 2004. Does his acquittal mean that he acted ethically? What ethical breaches can you find in his behavior at Tyco? What provisions in a credo might have helped Mr. Belnick see the issues more clearly?
3. What do you think of the ethics of Ms. Prue?
4. How do you think the spending and the loans were able to go on for so long?
5. What questions could Mr. Kozlowski and Mr. Swartz have asked themselves to better evaluate their conduct?
6. Evaluate the e-mails from Wilmer Cutler to general counsel and others in the company. Why were these warnings signs unheeded?
7. Make a list of the lines Mr. Kozlowski crossed in his tenure as CEO. Can any of those items help you in developing your credo? Mr. Kozlowski said, when he was named CEO of the Year by BusinessWeek, Most of us made it to the chief executive position because of a particularly high degree [of] responsibility.... We are offended most by the perception that we would waste the resources of a company that is a major part of our life and livelihood, and that we would be happy with directors who would permit waste .... So as a CEO I want a strong, competent board. \({ }^{645}\) What was he not seeing in his conduct? Had he grown complacent? Is it difficult for us to see ethical breaches that we commit?