ADT 2002 Annual Report Download - page 21

Continued scrutiny resulting from ongoing investigations may have an adverse effect on our business.
We and others have received subpoenas and requests from the SEC, the District Attorney of New
York County, the U.S. Attorney for the District of New Hampshire and others seeking the production
of voluminous documents in connection with various investigations into our governance, management,
operations, accounting and related controls. In addition, the Department of Labor is investigating us
and the administrators of certain of our benefit plans. We are also subject to ongoing audits by the
Internal Revenue Service. We cannot predict when these investigations will be completed, nor can we
predict what the results of these investigations may be. It is possible that we will be required to pay
material fines, consent to injunctions on future conduct, lose the ability to conduct business with
government instrumentalities or suffer other penalties, each of which could have a material adverse
effect on our business. We cannot assure you that the effects and results of these investigations will not
be material and adverse to our business, financial condition, results of operations and liquidity.
The Company and its subsidiaries’ income tax returns are periodically examined by various
regulatory tax authorities. In connection with such examinations, tax authorities, including the Internal
Revenue Service, have raised issues and proposed tax deficiencies. We are reviewing the issues raised
by the tax authorities and are contesting the proposed deficiencies. Amounts related to these tax
deficiencies and other tax contingencies that management has assessed as probable and estimable have
been accrued through the income tax provision. We cannot assure you that the ultimate resolution of
these tax deficiencies and contingencies will not have a material adverse effect on our financial
condition, results of operations and liquidity.
An ongoing SEC review of our public filings may require us to further amend or restate our public
disclosures.
We continue to be engaged in a dialogue with the Staff of the SEC’s Division of Corporation
Finance as part of their review of our periodic filings with the SEC and are subject to an investigation
by the SEC’s Division of Enforcement. In connection with such review, we have agreed to restate our
Consolidated Financial Statements for the quarters ended March 31, 2003 and December 31, 2002 and
the fiscal years ended September 30, 2002, 2001, 2000, 1999 and 1998. We are working to resolve the
remaining comments that the Staff of the SEC’s Division of Corporation Finance has made on our
periodic filings as expeditiously as possible. We cannot assure you the resolution of the Staff’s
remaining comments or the resolution of the Division of Enforcement’s investigation will not
necessitate further amendments or restatements to our previously-filed periodic reports or lead to some
enforcement proceedings against Tyco.
The Phase 2 review was not an exhaustive review of our accounting and governance.
In December 2002, we released a report summarizing the findings of the Phase 2 review. The
Phase 2 review covered a variety of aspects of our accounting, including a review of many specific
accounting policies and 15 of our most significant acquisitions. You should be aware that the review did
have limitations, as it did not seek to go back and identify every accounting decision and every
corporate act that was wrong or questionable over a multi-year period. Moreover, in part because of
the passage of time, documentation was not always available; the documentation that was available was
often dispersed; and the review did not have the benefit of information from prior senior corporate
management. In addition, the conclusions reached by the review required the exercise of judgment, and
others could disagree with its conclusions. Neither the SEC Division of Enforcement nor its Division of
Corporation Finance has completed its review of our accounting, including the matters covered by the
Phase 2 review.
You should note that the review found that, during at least the five years preceding our prior
CEO’s resignation in June 2002, Tyco’s prior management engaged in a pattern of aggressive
accounting that, even when in accordance with generally accepted accounting principles, or GAAP, was
intended to increase reported earnings above what they would have been if more conservative
19