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Tyco international Ltd is a global manufacturing and service providing company with a presence in more than sixty countries (Ashish, 2009). The company is a leading provider of security products and services, fire fighting services and controls. In 2002, a law firm called Lovell & Stewart; LLP filed a lawsuit on behalf of investors who had purchased common stocks of Tyco international between 1st February 2000 and 1st February 2002 (Ashish, 2009). The case known as Carlin vs. Tyco was filed on February 2002. The complaints were that the company had violated both sections 10 (b) and 20 (a) of the securities exchange act of 1934, and Rule 10 (b)-5 by issuing a series of misrepresentations to the market during the period beginning 1998 to 2002 thereby inflating the prices of the TYCO common stock (Ashish, 2009). According to All business (2002), the complaint alleged that TYCO's representations were rendered false and misleading by defendant's failure to disclose
a) That Tyco would achieve its earnings targets only through undisclosed acquisitions (All business, 2002).
b) That the individual defendants sold in excess of $ 100,000,000 of their individual stock holdings to the company (All business, 2002);
c) That TYCO's management procedures were to make large payments to insiders, including a $ 20,000,000 payment to one director and his charity for the interests of TYCO (All business, 2002).
When TYCO eventually released the true facts in October 2001 the company's stock fell by more than 40 percent. The plaintiff then sought to recover the damages suffered as a result of misrepresentation of the facts in question. In an effort to recover their damages, the shareholders had sued the company, its individual officers, directors and its auditor PricewaterhouseCoopers (PWC) for engaging in a securities fraud. PricewaterhouseCoopers as the auditing firm was expected to unearth all the anomalies that were going on at Tyco international which would have prevented a misrepresentation of facts to the shareholders. PwC was in a perfect position to uncover the fraud when the company exaggerated its income by $5.8 billion during the period in question (Johnson, 2007). However, the auditing firm did not do so therefore it was assumed that the firm was party to the hideous act.
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After engaging in a four year legal battle PricewaterhouseCoopers and Tyco international agreed to pay $ 3.2 billion to investors who bought and acquired shares in the period between December 13, 1999 and June, 7, 2002 as settlement for their damages (Norris, 2007). In this settlement Tyco international agreed to pay $ 2.7 billion while PwC contributed $225 million bringing the total amount to $3.2 Billion. In addition to this, the company's top officials who orchestrated the crime were charged and jailed. After payment of the attorneys' fees the money was divided among the investors who recovered their damages (Norris, 2007).
The overstatement of Tyco international income was not only a legal violation but was also against professional ethics and morals. The company sought to increase its earnings by taking advantage of investors through misrepresenting vital information. Had the information provided been true then the investors would have taken caution when investing their fortunes (Johnson, 2007). Accounting as a discipline is governed by professional ethics and this was a direct violation of these ethics. On the other hand, PricewaterhouseCoopers as a reputable auditing firm should have unearthed Tyco's act of misrepresenting data as soon as the crime happened. This would have helped the investors avoid participating in unscrupulous business.
The investors who had purchased Tyco's securities at artificially inflated prizes suffered great losses when the company revealed its true financial position. This was a criminal undertaking which involved concealing Tyco's financial position through fraudulent accounting entries and theft of the company's corporate assets. The individual persons who participated in the crime were Tyco's top management who were found guilty of embezzlement of the company's assets. Misrepresentation of data not only brings great consequences to all parties involved but also damages the reputation of firms involved. Therefore it is mandatory for companies to take preventive measures to curb these fraudulent practices.
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