The U.S. Securities and Exchange Commission has settled with Tyco International Ltd. alleging that the firm engaged in a billion-dollar accounting fraud.

The SEC filed a settled civil injunctive action in the US District Court for the Southern District of New York against Tyco today. The commission’s complaint alleges that, from 1996 through 2002, Tyco violated the federal securities laws by, among other things, utilizing various improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least US$1 billion.

It alleges that Tyco inflated its operating income by at least $500 million as a result of improper accounting practices related to some of the many acquisitions that Tyco engaged in during that time. Tyco’s improper acquisition accounting included undervaluing acquired assets, overvaluing acquired liabilities, and misusing accounting rules concerning the establishment and utilization of purchase accounting reserves. The complaint further alleges that, apart from its acquisition activities, Tyco improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance and smooth its publicly reported results and to meet earnings forecasts.

It also alleges that, from September 1996 through early 2002, Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related party transactions of its former senior management. Tyco also incorrectly accounted for certain executive bonuses it paid in its fiscal years 2000 and 2001, thereby excluding from its operating expenses the costs associated with those bonuses. Finally, the complaint alleges that Tyco violated the antibribery provisions of the Foreign Corrupt Practices Act when employees or agents of its Earth Tech Brasil Ltda. subsidiary made payments to Brazilian officials for the purpose of obtaining or retaining business for Tyco.

Between 1996 and 2002, as a result of these various practices, Tyco made false and misleading statements or omissions in its filings with the commission and its public statements to investors and analysts, the SEC says.

Without admitting or denying the allegations in the commission’s complaint, Tyco has consented to the entry of a final judgment permanently enjoining it from violating the antifraud, proxy disclosure, periodic reporting, corporate recordkeeping, and anti-bribery provisions of the federal securities laws. The proposed final judgment also orders Tyco to pay $1 in disgorgement and a $50 million civil penalty.

“This enforcement action shows that, in addition to looting the company, Tyco’s Kozlowski-era management lied about the company’s financial results,” said Linda Chatman Thomsen, the SEC’s director of enforcement. “Tyco benefited from this fraud, as the penalty in this case reflects.”

Scott Friestad, associate SEC enforcement director, stated, “The Tyco accounting fraud was orchestrated at the highest levels of the company, but carried out at numerous operating units and management levels of the company. ‘Push down’ frauds like this are especially difficult to detect and investigate. Today’s enforcement action shows that the commission and its staff will pursue such misconduct and take appropriate action.”