Detailed Analysis of PwC v Tyco Auditing and Accounting Case Study

This report examines the PwC v Tyco case, where the audit firm, PwC, faced a lawsuit due to its failure to detect significant financial fraud at Tyco International. The assignment delves into the facts of the case, highlighting the misrepresentation of financial statements through unreported stock sales and undisclosed interest-free loans to employees. The report analyzes the auditing and accounting issues, including the failure to recognize revenue correctly and the lack of disclosure regarding related-party transactions. The consequences of PwC's negligence are discussed, including the $225 million settlement and the implications for auditor liability and professional integrity. Furthermore, the root causes of the issues, such as market pressure and potential organizational culture problems are investigated, along with the ethical concerns raised by the case, providing a comprehensive overview of the events and their impact on the financial world.

AUDITING 1
AUDITING

AUDITING 2
The case undertaken for the purposes of this assignment is PWC v Tyco.
Part 1:
In the given case, the company Tyco International had paid an amount of $51.1 million to the
audit firm Price Waterhouse Coopers. Out of this amount, only an amount of $13.2 million
were for the conducting of auditors for the client. The balance or the remaining amount were
mainly for the consultation of taxes, merger conducting, due diligence etc.
The accountants of the company are now looking into the relevant facts of the case and the
reason as to which the hundreds of millions of dollars could go unreported in the final
accounts by it. The final accounts of the company were mi-represented and were also
misappropriated. This misrepresentation were mainly due to the stock sales that were
reported in the current month but were done during the earlier years. Also, there was a
misappropriation of the reporting of the interest free loans that were made to the company
employees, which resulted in an amount of $ 600 million cumulatively since the year 1995.
Even when the audit of the company was being done PWC, there was a failure on the part of
the audit firm and they were not able to find the fraud and hence, failed to report the same. A
complaint to this effect was filed in the US District court South District of New York. The
company had filed to disclose the following:
 That the earnings shall only be achieved through the undisclosed acquisition
 When the company is able to sell stock in excess of $100,000,000
 The management procedures of the company included the payment of a huge amount
of money to the insiders which includes the payment of one of its directors and the
charity funds.
The company failed to report on the accounting rules for recognition of revenue and also
failed to recognise the amount of revenue from the security contracts as only few mount were
received in its effect. Throughout this period the company was very aware about their adverse
financial effect which led to the effect of an amount of $1,000,000,000. But the company still
failed to disclose the stated amount under the partial disclosures ("Securities Class Action
Clearinghouse: Case Page", 2019).

AUDITING 3
Also, the company asserted various affirmations with regard to the ability of the company to
conduct the offering of stock for its subsidiary wherein the misleading and the false facts
were reported. As the result the stock of the company were inflated and due to which the
shareholders of the company went on to purchase stocks based upon their prices. The auditors
of the company failed to disclose the amounts of the loans that were made interest free to the
employees, the purchase of the personal homes for the directors of the company, the retention
of the law firm in which the director has commission based upon the amount of the work
which was done by it for the company, use of the funds of the company for the personal
reasons and uses. In short, there were related party transactions that went unreported ("PwC
settles Tyco lawsuit for $225m | Financial Times", 2019).
hence, the company went on to overstate the income earned by it by an amount of $5.8
billion. PWC agreed to pay $225 million to the company under review. This serves as a
victory of the investors and the shareholders. This penalty shows an increase number of
consequences when there was a break down in the function of audit.
PWC failed to discover any sort of misappropriation even when it had the relevant skills and
judgment and experience in doing so. The directors of the company along with some other
company officials were charged with the charges of fraud, grand larceny and reporting false
financials to SEC. till now, the exact amount of misappropriation is not known to any and
hence, it is tough to state the actual amount of loss suffered by the company.
The directors of the company received loans that went unreported along with the bonus which
was again unreported in the final accounts. The company was of the view that any specific
irregularity has not come to light till now and it had hired a forensic accounting firm to pass
through the books of accounts of the past years. The auditors of the company are entrusted
with the responsibility of reporting the correct facts of the company and report any
irregularity that occur in the financials of the company. But the cases like the one mentioned
above shakes the confidence and the integrity of the shareholders and also of the public at
large.
In the present case, SEC stated that the senior most management of the company was looting
the company and Scalzo was being confronted with many warning signs questioning the
integrity of the management. But he did not sanction anything since he failed to discover nay

AUDITING 4
sort of looting and then he was charged with the fraud despite many warnings ("What Did
Tyco's Auditor Know?", 2019).
Part 2:
The company were manipulating the figures contained in the financials, it does so in order to
show a better financial picture of the company to the public so that there interest, investment
and confidence remains intact into the company. Each company prepares a budget for the
next period. May be, in this case, in order to meet that budget, the company may have
manipulated the earnings and painted a better financial picture of the company. This is done
so that the management of the company could get higher bonuses, there could be market
pressure etc. (Johnson, 2019).

AUDITING 5
References:
Johnson, S. (2019). PwC Settles Tyco Case for $225M - CFO. Retrieved 1 October 2019,
from https://www.cfo.com/accounting-tax/2007/07/pwc-settles-tyco-case-for-225m/
PwC settles Tyco lawsuit for $225m | Financial Times. (2019). Retrieved 1 October 2019,
from https://www.ft.com/content/90c2350e-2c0f-11dc-b498-000b5df10621
Securities Class Action Clearinghouse: Case Page. (2019). Retrieved 1 October 2019, from
http://securities.stanford.edu/filings-case.html?id=102326
What Did Tyco's Auditor Know?. (2019). Retrieved 1 October 2019, from
https://www.forbes.com/2002/09/30/0930pwc.html#42ebae9b1eef