Tyco Corporate Scandal of 2002 (Ethics Case Analysis)

Tyco ethics case study, 2002 corporate scandal, Kozlowski motivation avoid taxes, commingling assets, Board of directors
A Tyco vehicle. The Tyco Corporate Scandal of 2002 requires an analysis of Kozlowski’s motivation for tax avoidance on art purchases. The concept of commingling assets and inaction of the Board of Directors also affected the case. (Photo: Public Domain)

The case of Tyco’s corporate scandal of 2002 focuses on the problem of unethical business practice and related issues. Tyco was a large organization that grew through numerous acquisitions. Tyco’s case shows that the problem was the unethical business practices of a number of its top ranking officers, especially CEO Kozlowski. Kozlowski was involved in numerous financial transactions that were not included in the financial reports of the company. Kozlowski was also involved in unethical transactions with other Tyco officers and lower ranking employees to cover up for Kozlowski’s illegal financial transactions. Kozlowski even got outsiders involved in the problem when his second wife received money diverted from the firm. Court proceedings proved that Kozlowski stole millions of dollars from Tyco, and that his illegal financial transactions were extensive. Kozlowski and other officers from Tyco were imprisoned. Tyco declined as investors lost confidence in the company.

This article analyzes the major ethics issues in the Tyco corporate scandal of 2002, CEO Kozlowski’s motivation to avoid sales taxes on art purchases, the relevance of the concept of commingling assets, and the role of the board of directors in monitoring adjustments in Tyco’s programs.

Major Ethics Issues in Tyco’s Case

Tyco’s case shows that ethics issues can occur in different parts of an organization. Supposedly trusted leaders and executives with commendable background could exhibit unethical behavior and get involved in unethical practices. Even outsiders or third parties could get involved in these ethics issues. Thus, codes of ethics and relevant assessments of the organization must include employees at all organizational levels, as well as significant third parties that interact in operations. The major ethics issues in Tyco’s case were as follows:

  1. Unethical Leadership
  2. Unethical business practice of subordinates
  3. Unethical auditing practice on Tyco’s business

Tyco’s Unethical Leadership. The unethical business practice of leaders was observed in Kozlowski. Kozlowski was the main actor in the financial troubles and legal battles in this case. Kozlowski was the main recipient of the money stolen from Tyco. In addition, he was the main influential person who persuaded other top-ranking Tyco officers and lower ranking employees to get involved and to keep silent to cover up for Kozlowski’s illegal activities. This case shows that extensive involvement of Kozlowski and other leaders in unethical and illegal activity brought Tyco down.

Unethical Business Practice of Subordinates. The complications in Tyco’s case involved people other than Kozlowski. Kozlowski recruited the support of other high-ranking officers in the organization. He also convinced some lower ranking employees to keep their silence in exchange for financial benefits. Also, Kozlowski convinced one of the board members to keep silent about the illegal financial transactions on the mansion Tyco paid for the benefit of Kozlowski and his wife. In exchange, the board member received financial benefits.

Unethical Auditing Practice. The auditing firm PricewaterhouseCoopers responsible for checking the financial reports of Tyco failed to identify Kozlowski’s illegal financial transactions. As a result, Kozlowski’s unethical business practice continued and became extensive. These practices became more difficult to stop because of absent constraining influence from the auditing firm.

Kozlowski’s Motivation for Avoiding Sales Taxes on Art Purchases

Kozlowski’s motivation for trying to avoid sales tax on his art purchases were (1) his materialistic desires, and (2) his avoidance of raising a red flag on his illegal activities at Tyco.

Kozlowski’s materialistic desires pointed to greed for financial or material gains. These desires led him to commit illegal financial transactions at Tyco. This case shows that Kozlowski had a history of tax evasion that goes even years before investigations started. Thus, he has a history of prioritizing materialistic gains over ethical conduct.

Also, Kozlowski tried to avoid paying sales taxes for his art purchases because doing so would raise red flags for authorities. Sales taxes create formal records of financial transactions. In Tyco’s case, the sales taxes amounted to millions because the purchased art items were expensive. It would have been easier for authorities to detect Kozlowski’s illegal financial transactions because it was unusual for Tyco officers like Kozlowski to make such big purchases in a small amount of time.

Commingling of Assets in Tyco’s Case

The concept of commingling of assets in Tyco’s case refers to the adoption of the view that the assets of an employee are similar to the assets of the company. Commingling of assets occurred when Kozlowski considered the assets of Tyco as his own personal assets. The case shows that Kozlowski used Tyco’s funds to pay for his personal expenses. He used Tyco’s money to pay for his second wife’s birthday party. He also used Tyco’s money to cover the costs of properties he purchased. He used the company’s money to purchase household items and art pieces for his personal use.

Tyco’s case shows that commingling of assets made it easy for Kozlowski to use the company’s assets for personal needs. The company had programs that enabled Kozlowski to unethically use assets for personal needs. Kozlowski’s use of Tyco’s money was not just mere stealing of funds. It was also an exploitation of the weakness of the financial loopholes in the firm at the time of his leadership.

Board of Directors and Adjustments in Tyco’s Programs

It would have been possible for the board of directors to see the adjustments taking place in programs at Tyco. This would have been so if the board of directors had appropriate mindsets and activity. Tyco’s programs were a weakness in the organization. These programs provided benefits to officers and other employees. The financial programs were opportunities for Kozlowski’s illegal financial transactions and unethical business practices.

The board of directors should have examined these programs to evaluate their appropriateness. The directors should have identified the programs’ weaknesses and loopholes, which Kozlowski and other officers exploited for their own personal benefit for years. Thus, the ineffectiveness of the board of directors in examining Tyco’s programs enabled Kozlowski’s unethical business practices.