ADT 2002 Annual Report Download - page 48

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies
Basis of Presentation—The Consolidated Financial Statements include the consolidated accounts of
Tyco International Ltd., a company incorporated in Bermuda, and its subsidiaries (Tyco and all its
subsidiaries, hereinafter ‘‘we,’’ the ‘‘Company’’ or ‘‘Tyco’’) and have been prepared in United States
dollars, and in accordance with Generally Accepted Accounting Principles in the United States
(‘‘GAAP’’). As described in Note 11, CIT Group Inc. (‘‘CIT’’), which comprised the operations of the
Tyco Capital business segment, was sold in an initial public offering (‘‘IPO’’) in July 2002.
Consequently, the results of Tyco Capital are presented as discontinued operations. References to Tyco
refer to its continuing operations, with the exception of the discussions regarding discontinued
operations in Note 11. The continuing operations of Tyco represent what was referred to as Tyco
Industrial in prior filings.
Investigation—With the arrival of new senior management, the Company has engaged in a number
of internal audits aimed at determining what, if any, misconduct may have been committed by prior
senior management. An initial review of prior management’s transactions with the Company was
conducted by the law firm of Boies, Schiller & Flexner LLP. The details of their findings were made
public in a Form 8-K filed on September 17, 2002. In July 2002, our new CEO and our Board of
Directors ordered a further review of corporate governance practices and the accounting of selected
acquisitions. This review has been referred to as the ‘‘Phase 2 review.’’
The Phase 2 review was conducted by the law firm of Boies, Schiller & Flexner LLP and the Boies
firm was in turn assisted by forensic accountants. The review received the full cooperation of Tyco’s
auditors, PricewaterhouseCoopers LLP, as well as Tyco’s new senior management team. The review
included an examination of Tyco’s reported revenues, profits, cash flow, internal auditing and control
procedures, accounting for major acquisitions and reserves, the use of 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, employee loan and loan forgiveness programs. Approximately 25
lawyers and 100 accountants worked on the review from August into December 2002. In total, at
considerable cost, more than 15,000 lawyer hours and 50,000 accountant hours were dedicated to this
review. The review team examined documents and interviewed Tyco personnel at more than 45
operating units in the United States and in 12 foreign countries.
The results of the Phase 2 review were reported by the Company in a Form 8-K furnished to the
SEC on December 30, 2002.
Restatement—As previously disclosed, we have been engaged in a dialogue with the staff of the
Division of Corporation Finance of the U.S. Securities and Exchange Commission (the ‘‘Staff’’) as part
of a review of our periodic filings. We believed that we had resolved the material accounting issues at
the time of the original filing of our Form 10-K for the year ended September 30, 2002. Subsequent
correspondence and discussions with the Staff, principally regarding the method of amortizing contracts
acquired through our ADT dealer program as well as the accounting for amounts reimbursed to us
from ADT dealers, coupled with issues related to prior periods identified during our intensified internal
audits and detailed operating reviews in the quarter ended March 31, 2003 have led us to restate our
consolidated financial statements for the quarters ended March 31, 2003 and December 31, 2002, and
for the fiscal years ended September 30, 2002, 2001, 2000, 1999 and 1998.
The restatement principally relates to (i) recording charges in the prior years and quarters to
which they relate, rather than in the period such charges were initially identified, (ii) a revision in the
method of amortization used to allocate the costs of contracts acquired through our ADT dealer
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