Dennis Kozlowski was a dominant, largerthan-

life CEO of Tyco International, Ltd, a multi-billion-dollar company whose shares are still traded on the New York Stock Exchange (Symbol: TYC). His stature was huge, and his appetite for excess knew no bounds. Noted author Tom Wolfe, who wrote Bonfire of the Vanities, which profiled such men, says that “if you feel you are a master of the universe, then a lot of rules just don’t apply,”1 and this quote seems to apply well to Kozlowski.

Kozlowski was rolling along—often using company money—having lavish parties, planes, and cars and enjoying multiple homes with fittings such as a \($6,000\) shower curtain and a \($15,000\) umbrella stand, a yacht, and an impressive art collection. It was his interest in art that triggered the first investigation in January 2002 by New York State officials who asked about the sales tax on several multi-million-dollar paintings.2 Kozlowski had evaded the payment of sales tax on them and was subsequently first charged in a New York court.

For Dennis, this was most unfortunate because on conviction, he would serve time in the New York prison system instead of a federal prison in which white-collar criminals often are assigned to facilities known as “Club Feds” or, for women such as Martha Stewart, “Camp Cupcake.” The New York prison system is very harsh.

According to former New York prosecutor David Gourevitch, “The fed system is unpleasant, but at least you’re physically safe there.… In the state system, nobody would say you are physically safe.”3 For Kozlowski and his associate Mark Swartz, his Tyco CFO who faced up to thirty years in prison, this prospect was surely daunting.

On the other hand, Kozlowski had certainly enjoyed high living, so many observers would argue he got what he deserved.

Take the \($2\) million 40th birthday party for his new wife on the Mediterranean island of Sardinia, more than half of which was paid for by Tyco. Jurors were shown an edited twenty-one-minute version of a four-hour videotape covering the whole week with seventy-five guests. The short version did not show inflammatory scenes, such as “an anatomically correct ice sculpture of Michelangelo’s David spurting vodka,”4 scantily clad and unclad dancers, and so on. Music was provided by Jimmy Buffet and his group at a cost of \($250,000\) and a rock band at a cost of \($20,000.5\) No wonder Kozlowski was charged with looting the company.

Questions:-

1. The pattern of illegal and improper conduct described above took place for at least five years prior to June 3, 2002. What red flags or governance mechanisms should have alerted the following people to this pattern?

a. Tyco management accountants

b. Tyco internal auditors

c. Tyco external auditors

d. Tyco board of directors 2. Identify and discuss the most important weaknesses in Tyco’s internal controls and its governance systems.
3. Would a post-SOX whistleblowing program to the Audit Committee of the board have eliminated the improper and illegal actions? Why or why not?
4. If you have been a professional accountant employed by Tyco during this time and you wanted to blow the whistle, who would you have gone to with your story?
5. Why were so many Tyco employees willing to go along quietly with the looting by senior executives?
6. How many years in jail do you think Kozlowski should have received for his white-collar crimes?