ADT 2002 Annual Report Download - page 31

PART III
Item 14. Controls and Procedures
As reported more fully in our Form 10-K filed December 30, 2002, as amended, we learned of
instances of breakdowns of certain internal controls during fiscal 2002.
Our former Board of Directors retained the law firm of Boies, Schiller & Flexner LLP in
April 2002 to conduct an investigation. The scope of the investigation consisted of a review and analysis
of transactions between and among Tyco and its subsidiaries and our directors and officers. The
findings of the first phase (Phase 1) were reported on September 17, 2002 in a Current Report on
Form 8-K.
In connection with the Phase 1 findings and at the direction of the Board and our new Chief
Executive Officer, the investigation was expanded to a second phase (Phase 2), which involved a more
comprehensive review of Tyco’s accounting and financial reporting. The scope of the Phase 2 review
included an examination of Tyco’s reported revenues, profits, cash flow, internal auditing and control
procedures, use of reserves, and non-recurring charges, as well as corporate governance issues such as
the personal use of corporate assets and the use of corporate funds to pay personal expenses, and
employee loan and loan forgiveness programs. Phase 2 of the investigation was completed by the Boies
firm in late December 2002.
It was concluded that:
• There was no significant or systemic fraud affecting Tyco’s prior financial statements;
• There were a number of accounting entries and treatments that were incorrect and required
correction;
• The incorrect accounting entries and treatments are not individually or in the aggregate material
to the overall financial statements of Tyco;
• Our prior senior management engaged in a pattern of aggressive accounting which, even when in
accordance with generally accepted accounting principles, was intended to increase reported
earnings above what they would have been if more conservative accounting had been employed;
and
• Reversal or restatement of prior accounting entries and treatments resulting from the aggressive
accounting pursued by prior senior management would not materially adversely affect our
reported revenue, earnings and cash flow for 2003 and thereafter.
These findings were reported on December 30, 2002 in a Current Report on Form 8-K.
While most of the matters identified by the review as ‘‘aggressive accounting’’ were determined by
Tyco, in consultation with its auditors, to be in accordance with generally accepted accounting
principles, there were, as indicated above, certain adjustments (19 in total) identified as relating to
years preceding fiscal 2002. As part of the restatements these adjustments have been recorded in the
periods to which they relate as described in Note 1 to the financial statements included elsewhere
herein.
Additionally, our new senior management team in conjunction with our Board of Directors
reviewed overall company policies and procedures in areas that were viewed as important. Specific
areas of focus included acquisition accounting, restructuring, financial and legal controls, reserve
utilization, incentive compensation and a number of other areas relevant to our financial statements.
New senior management determined that Tyco’s existing policies and standards of approval needed
substantial improvement and found that there were instances in which documentation of important
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