Adelphia Comes Clean

Can Vanessa Wittman help bring scandal-wracked Adelphia out of bankruptcy -- and back into investors' good graces?

But getting rid of Kozlowski and Swartz—whose alleged offenses include self-dealing transactions, unapproved bonuses, and fraudulent stock sales—was just the beginning. An in-house probe revealed major breakdowns in financial controls, including transparency problems in the plastics division and suspect operating income in the ADT unit.

In short order, Breen expanded the ongoing internal audit into a full-scale, independent investigation that kept 25 lawyers—led by superstar attorney David Boies—and 100 accountants busy for five months. The investigation uncovered breakdowns in the control processes associated with executive compensation, and problems with reported revenues, profits, cash flows, use of reserves, and nonrecurring charges, among other financial shortcomings.

So far, several repair measures have been implemented, says Tyco spokesman Gary Holmes, including splitting the plastics group into two reporting segments, changing the definition of free cash flow to include cash paid for the acquisition of new dealer accounts, and providing details of how “organic growth” is calculated.

FitzPatrick asked all financial managers and executives to sign an ethical code of conduct, and he is confident that the problems have been addressed. “During 2003, a considerable portion of my time was spent looking backward,” says FitzPatrick. “Now, I’m ready to look forward.”

Still, several hurdles remain to be cleared. “Breen’s on target, but he’s been left with no systems in place to track what’s going on,” observes Langenberg. “There’s no operating plan or strategic-forecasting methodology.” Then there are the continuing reporting gaffes. When the internal review was completed, in late 2002, Tyco pronounced itself free of fraud, and Breen said that restatements for prior quarters were a thing of the past—only to see the company restate one more time. So far, Tyco has made $1.1 billion worth of adjustments since Breen’s arrival.

Despite Tyco’s woes, the company’s prospects are good. Its portfolio is strong, says Langenberg; many of the companies rank first or second in their respective industries. By his lights, Tyco’s stock prospects are “more bull than bear.” As long, that is, as it keeps the bull out of its financial reporting.

Joseph McCafferty, with Marie Leone and Craig Schneider

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