ADT employees face questions from SEC

Tuesday, June 1, 2004

WEST WINDSOR, N.J. - Former and current employees of Tyco’s ADT Security Services division have been subpoenaed by the Securities and Exchange Commission to testify on how the company accounted for a connection fee it previously charged its authorized dealers.

The inquiry comes a year and a half after Tyco restated its earnings for the first three quarters of 2001, a restatement that lowered the company’s earnings by $125 million. At that time, auditors found ADT had been recording aquisitions of new customers as long-term capital cost, instead of as expenses.

Tyco revealed that the SEC subpoenaed current and former employees of ADT in its 10-Q quarterly report filed in mid-May. In the report, the company said it has received subpoenas and requests for documents from the SEC, District Attorney of New York, U.S. Attorney for New Hampshire and the Equal Employment Opportunity Commission.

Gwen Fisher, a spokesperson for Tyco, could offer few details on the inquiry except to say the company “continues to cooperate with the SEC in making documents and witnesses available.” Fisher declined to name who has been subpoenaed.

Mike Snyder continues to head ADT Security Services for Tyco, while Jerry Boggess, the former head of the Fire and Security Division, was removed from his position a year ago.

The subpoena and continued inquiry come as little surprise to Jack Mallon, a security industry analyst and managing director of Mallon Associates. “It reflects the current environment to the super sensitivity for any accounting irregularity,” he said.

Mallon said he could not speculate on which ADT employees would be called in for questioning, but expects the initial focus will be on financial executives.

According to a report in the Wall Street Journal, the dealer connection fee is a former practice that began in the late 1990s as part of ADT’s authorized dealer program. ADT would pay a dealer $1,000 for a security contract, but charged the dealer a $200 connection fee.

The report said Tyco booked the $1,000 as a capital expense, but the $200 connection fee was booked as an immediate profit.

Tyco has come under increased scrutiny in recent years for its accounting practices, with some critics claiming the company artificially inflated its numbers.

Mallon said despite the inquiry, critics of Tyco should remember that restatements and changes to accounting have been a common practice of public companies for years.

“An investigation of accounting should not be deemed an indictment of the company,” he said. “I think we have to wait for the findings from the inquiry.”