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Essay: Kozlowski, creative accounting, tax avoidance

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  • Published: 22 September 2015*
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Questions for Thought
1. What do you think Kozlowski’s motivation for trying to avoid sales taxes on his art purchases was? Explain.
First let’s separate tax avoidance from tax evasion. Tax avoidance is a common practice among business entities. Which you don’t pay all your business taxes; instead, you ‘capitalize on the various deductions and loopholes available’ (Devine, n.d.a). Tax evasion is where you ‘purposefully avoid paying taxes’ (Devine, n.d.a), without the presence of a loophole, or paying your personal or corporate tax obligations.
Kozlowski’s motivation for ‘tax avoidance’ or finding loopholes for various deductions within the system was his ‘distaste’ (Stanwick & Stanwick, 2009) to avoid paying sales taxes. He found loopholes in the system, by shipping paintings he bought in New York to New Hampshire and saved $1 million dollars in sales tax.
Kozlowski got caught in a tax invasion scheme which he was trying to avoid paying taxes. Under ‘state law’ (Hamilton, 2002), people can buy goods in New York can ship them to another state and not pay taxes on the art. By falsifying documents and having Tyco employee sign for ’empty crates’ (Stanwick & Stanwick, 2009) that led the motivation for thinking that Tyco was buying these paintings. In fact Kozlowski was the one actual buying the paintings.
Tax avoidance became a way of life for Kozlowski and key corporate strategy. Five years before his conviction he moved Tyco’s headquarters to Bermuda to avoid paying taxes. He has gone to great lengths assembly subsidiaries in locales such as Barbados and the Cayman Islands. This corporate strategy paid off, in five years from 1996 to 2001 he reduced his ‘effective tax rate from 36% to 23%’ (Symonds & Smith, 2002).
From a manager’s perspective, there are two key responsibilities that need to be implemented to ensure the firm’s employees have a strong ethical value system to guide them. Management’s first responsibility is to verify that ethical decisions are made by all levels of employees. The second responsibility is to develop an organizational culture that supports the ethical decision-making process. (Stanwick & Stanwick, 2009)
The manager has the responsibility to ensure that a strong ethical value system is in place to guide them. Kozlowski did not think his ethical decision process out. He let money motivate him to make poor ethical decisions. This shape the culture of the corporation to become unethical. From Kozlowski perspective he was at the top.
Kozlowski could be considered ‘amoral manager’ (“Difference”, n.b.a). He found all the legal rights in avoiding paying too much tax. He did not planned his decision making process. In his mind he thought he was unintentionally committing unethical acts. He was not thinking about the impact that decisions he was making on the stakeholders.
2. Explain the concept of commingling assets with respect to the Tyco case.
Commingling assets is where the corporation board of directors of CEO mixes personal funds with the funds of the corporation. You are treating your business funds as your personal money (Commingling, n.d.a).
Key Employee Relocation Program
The employee relocation program was a program to compensate employees when they relocated to the headquarters in New York office of Tyco. Kozlowski and Swartz wanted to adjust the scope of the program to include additional benefits for executives such as paying executives for second homes and private school tuition for children (Stanwick & Stanwick, 2009).
John Fort III, a former Tyco CEO and director testify against Kozlowski “that was never the intent of the program.” (McCoy, 2003). That top executives use the Key Employee Relocation Program for personal use. They use company funds or business assets for personal needs in buying yachts, homes, and antiques to name just a few (Tyco1, 2002).
Key Employer Loan Program
Tyco in 1983, establish a Key Employer Loan Program. The program was intended to be use by top executives so they could borrow the needed money to pay the off the taxes on their stock options. Tyco had the belief that this program would let top executives kept their stock options instead of selling them off to pay taxes. It was spelled out specify in the 1995 proxy statement that was just that, to pay taxes on stock options (Stanwick & Stanwick, 2009).
One instance is where Kozlowski tapped into the program to borrow ‘$5 million for a diamond ring’ (McCoy, 2004) for his wife. Other expenses that total over $2 million was for restaurant bills and art purchases for his home.
In his first trail in 1997, Tyco’s former treasurer Barbara Miller testified that the scope of the program moved beyond loans and tax payments. The understanding from Tyco’s former CFO, Swartz, told Miller that the restriction to the program. Was the total amount borrowed must not surpass a calculated percentage of the executive’s restricted stock holding based on the executive’s tax rate.
Barbara Miller, testified in the first trial that in 1997, that the scope of the program moved beyond loans for tax payments. Executives could now borrow money for any reason with the ‘only restriction’ (Stanwick & Stanwick, 2009).being that the total amount borrowed. Kozlowski and Swartz borrowed Tyco money through this program for personal use to buy real estate, jewelry, and other personal items.
Happy Birthday Karen!
A Birthday party hosted by Dennis Kozlowski for wife Karen in a luxurious in Sardinia in Italy. The ‘guests did not pay for nothing’ (Farrell & McCoy, 2006), because half the guests was Tyco executives. Kozlowski charged half the bill to the company.
Tyco Bonus Program
This program was not authorized by the board of directors. Tyco bonus Program was to let employees forgive relocation loans who bought homes and moved to the Tyco offices in Boca Raton Florida (Stanwick & Stanwick, 2009). Tyco employees received TyCom bonuses that was in the form of loan forgiveness to cover tax liabilities. Tyco employees was asked to sign a letter and pledge not to mention this payment to no one not even their coworkers (Witness, 2005).
As these acts was unfolding during Kozlowski employment at Tyco. He commingled these funds as a breach of fiduciary duties. The proceeds that he obtained or transferred from business funds to his personal account without documenting. Kozlowski was required as the CEO to act in ‘good faith and honestly’ (Tyco1, 2002) with the best interests of the company. He failed to fulfill his due diligence as CEO under the circumstances that allowed him, His breached of fiduciary duties to the company and failed to execute his duties in a professional manner. As a result he profit millions from ‘undisclosed and unauthorized amounts’ (Tyco1, 2002) of company money. To fulfill his needs ‘greed’ through these programs.

3. Would it have been possible for the board of directors to see the adjustments taking place in the many different programs at Tyco? Explain.
On September 12, 2002, Tyco brought a complaint against Dennis Kozlowski to United States District Court Southern District of New York.
Kozlowski begin in early 1995, to abuse the trust in the Tyco’s Board of Directors. The compliant stated he misappropriate money and assets from the Company. He engaged in a pattern of conduct to conceal his larcenous acts from the Board. He encouraged and conspired other senior officers to breach their own fiduciary duties from the company. By entering into various undisclosed agreements with these personal and share his misappropriations of money and assets. In return he received compensation that was concealed from the company. (TYCO INTERNATIONAL LTD., v. L. DENNIS KOZLOWSKI,, 2002).
The following are several conflict of interest cases involving interim CEO John Fort, CEO Kozlowski and board members. The first case is acting intern CEO John Fort.
John Fort was an investor and advisor for DLJ Merchant Banking Partners II. He ‘failed to notify’ (Stanwick & Stanwick, 2009) the Board of Directors when Tyco bought DLJ Merchant Banking Partners II.
Frank Walsh independent board member took a ‘secret deal’ (Stanwick & Stanwick, 2009) from Kozlowski for helping Tyco buy CIT group for $20 million.
Board member Stephan Foss had a ‘business Relationship’ (Stanwick & Stanwick, 2009) with Tyco while leasing an airplane to them.
Between the time periods of 1998-2001, board of directors was categorize as ‘being out of control’ when it came to ‘decision-making process’ (Stanwick & Stanwick, 2009). Between this timeframe millions of dollars was received by Kozlowski and Swartz in stock options from Tyco.
These are just a few incidents that occurred with the board of directors. That turned a ‘blind eye’ or ignore the adjustments taking place in the many programs at Tyco. To enhance their financial gain. At the time these members did believe they was causing conflict of interest, or irrational business or financial relationships. That resulted in millions of dollars being transferred resulting in ethical dilemmas for Tyco board of directors.
Kozlowski was using his power as a CEO to enhance his self-interests and abuse others on the board of directors with his abuse of power. He was influencing people by manipulating the viewpoint to receive compensation that he concealed from the company.
The whole time this was going on the accountants that was hired by Tyco. Was using a method called ‘creative accounting’ (Stanwick & Stanwick, 2009) deviating from the traditional methods or interpret an accounting rule or standard. The accountants believe the risk for fraud was low used a model called ‘risk-based audit model’ (Stanwick & Stanwick, 2009). This model relies on want the clients tell the auditors, instead of evaluating the items themselves.
As the Board of Directors conducting wrong doing. The Securities and Exchange Commission (SEC), the Manhattan D.A. and Tyco started to investigate Kozlowski and former corporate officials (Weinburg, 2002). The charges that was brought include falsifying regulatory filings, fraud, and grand larceny. According to the SEC settlement, ‘PricewaterhouseCoopers partner Richard P. Scalzo’ (Weinberg, 2003) was aware of several improper payments under a Tyco program designed to cover taxes on vested restricted stock.
The SEC reported that Scalzo did not push for disclosure of non-interest-bearing ‘relocation’ loans made to several members of Tyco’s former management. The SEC also says that Scalzo was aware of several improper accounting procedures, including off-setting charges, reserve treatment and improper accounting for executive bonuses, including Walsh’s finder’s fee (Weinberg, 2003).

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