AAER No. 3409 – SEC v. Tyco International Ltd
In early 2006, a Commission filing over disclosures, accounting fraud and a FCPA injunctive action against Tyco was settled and led to the agreement of an overview of Tyco’s global organization.
The investigation of the matter then led to the findings of the misconducts that Tyco is getting Charged for in this case. During the fiscal years 2006-2009, Tyco Inc. was found to be involved in several illicit payment schemes. The company filed misstated financial statements with the SEC, failed to place and maintain efficient internal controls, paid false commissions and payments through a third party, and violated anti-bribery provisions set by the FCPA.
By using Tyco’s international business, illegal acts were easily hidden within the financial statements and the company was able to earn $10.5 million in profits by employees’ commissions and promises with third party contracts. Improper reporting of books and records was one of Tyco main issues.
This was a violation of Section 13(b)(2)(A) of the Exchange Act. Misstated books and records were the results of the illegal actions by several regions of Tyco. The misconduct the company was involved in caused the records to be misstated. Both ADT Thailand and THC Saudi Arabia recorded expenses improperly and failed to apply policies that ensured correct record keeping.
Between the two organizations, Tyco received $2,004,171 in illegal payments through their financial statements. Tyco’s failure to use and maintain internal controls contributed to several illicit payment schemes. TFC HK and Keystone- China did not follow Tyco’s control policies and was able to make payments of $ 246,000 to a third-party agent to insure sales with a Chinese petrochemical company.
TFIS UK – Egypt also took advantage of the absence of internal controls. By using a former employee’s bank account, they filed entertainment expense to hide trips to the United Kingdom and the United States. The Egyptian agents also submitted inflated invoice to cover excess entertainment expenses. Without working internal controls in place, Tyco was able to benefit with $1,785,958 and violated Section 13(b)(2)(B) of the Exchange Act.
Tyco was also found to the in violation of Section 30A(a) over anti-bribery provisions with third parties. To insure contacts, sales prices and project, bribes were made between several of Tyco’s companies and government agents, board of directors, and site project teams. M/A-COM – Turkey, TTC China, TWW Germany, TFIS France, TFS Malaysis and THC Polska was all found to be involved with bribery and in total Tyco benefited with over $6 million in contracts acquired due to the bribes.
Auditor’s Prevention of the AAER
Richard P. Scalzo, a former PwC engagement partner, was responsible for the firm’s audits of Tyco International Ltd during the period under question. Foremost, the auditor should have considered the business risk associated with client continuance.
In 2006, the Company was undergoing proceedings with the SEC for utilizing various improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars. Taking such circumstances into assessment of engagement risk, the auditor should have discontinued services for the Company.
Although auditing standards do not require auditors to identify all instances of fraud, they should provide reasonable assurance that all instances of material fraud are discovered. Likewise, an auditor should asses the probability of illegal acts and should maintain the same responsibility for such occurrences as for material misstatements. Scalzo failed to identify countless fraudulent misstatements as well as several illicit payment schemes.
The Company violated anti-bribery payments through several transactions by the international subsidiaries. Though the illegal payments were hidden in transactions, many employees were aware of one of the incidents.
Had the auditor performed efficient inquiry procedures, the illegal bribes could have emerged. Additionally, generally accepted auditing standards require the auditor to attain a full understanding of the internal controls system prior to beginning the auditing process. If these procedures had been performed thoroughly, the auditor should have noticed the Company’s failure to maintain sufficient internal controls.
The Company did not have controls in place to provide reasonable assurance that the financial statements are reliable, that operations are effective and efficient, and that laws and regulations are followed. The company’s internal controls failed to detect inaccurate transactions, inflated invoices, a lack of commitment to third-party policies, and fake receipts and contracts.
In realizing the inefficient controls, the auditor would have required a greater scope of substantive procedures. Furthermore, the control risk for all accounts should have increased, which would have resulted in more substantive procedures. Due to the lack of internal controls, inherent risks for accounts such as commission, entertainment reimbursements and expenses should have also been increased to increase the scope of tests performed.
For the particular accounts that were misstated, the auditor failed to obtain sufficient and appropriate evidence with respect to existence of invoices and contracts and the valuation of invoices. The auditor should have increased procedures for testing the existence of invoices and contracts; efficient and thorough vouching would have revealed payments that lacked documentation from invoices or contracts.
Similarly, the auditor should have increased procedures for testing the valuation of invoices, particularly for the pricing of products. In doing so, the auditor would have recognized inflated prices. Additionally, external confirmations would have confirmed that inaccurate transactions were recorded in accounts that did not reflect the ultimate recipients of the funds.
Tyco agreed to a proposed final judgment for violating Sections 13(b)(2)(A), 13(b)(2)(B), and 30A(a) of the Securities of Exchange Act of 1934 and was ordered to pay disgorgement of $10,564,992, plus prejudgment interest of $2,566,517. This proposed settlement is subject to the approval of the District Court.
Tyco also settled criminal charges on the matter by paying penalties in excess of $13 million to the Department of Justice. Tyco Voluntarily disclosed the conduct to the Commission. Tyco also took extensive remedial measures such as firing over 90 employees that were involved in the misconduct and making significant enhancements to its FCPA compliance program.