(FORTUNE Magazine) – Don't let the recent buoyancy of the stock market fool you. Most investors are still deep-in-their-gut afraid to dive back into the water. And the fears have little to do with the latest Fed report, inventory statistic, or other economic indicator. No, the big concern is the weather. Will another Enron-like storm be sweeping across the country? Are there torrents of financial funny business yet to be uncovered?

It is this overarching issue that provides the context for the seemingly "penny-ante" questions now being raised about one company's past in particular. That company is Tyco, the sprawling Bermuda-based conglomerate that booked $36 billion in revenues--and close to $4 billion in profits--last year. Of all the companies to come under scrutiny post-Enron, few have felt the glare more than Tyco; after Enron's collapse, Tyco's stock dropped 61%, from almost $60 a share to $23--erasing $70 billion in market cap in less than nine weeks--in no small part because investors began asking tough questions about its accounting. (The stock has since rebounded to the mid-30s.)

During the past decade Tyco has acquired hundreds of humdrum businesses--an astounding 700 in the past three years alone. That strategy helped fuel a revenue-growth rate that has averaged 24% over the same time. That growth, in turn, propelled the stock price upward and transformed CEO Dennis Kozlowski into a hero among the CNBC crowd. But even before Enron, there were those who questioned whether Tyco's vaunted growth was real--or whether the company was padding its numbers by being overly aggressive in some of its acquisition accounting. Two years ago, short-seller David Tice of the Prudent Bear fund blasted Tyco for taking inappropriately large restructuring reserves for its acquisitions. Another short-seller, James Chanos of Kynikos Associates, known now as the man who first pointed the finger at Enron, took it a step further: He charged that Tyco plays games during the "stub" period--the weeks just before an acquisition closes--to make the purchased company look worse than it is. The result, says Chanos, is that after the merger the new Tyco unit's "growth, profitability, and cash flow are stronger than would otherwise be the case." Chanos calls it "spring-loading." To be sure, the practice Chanos describes is not illegal--but then again, neither were many of Enron's off-balance-sheet partnerships. But spring-loading misleads investors nonetheless.

Tyco has consistently and emphatically denied doing anything that would artificially boost earnings. But not long ago FORTUNE obtained a series of e-mails that suggest that in at least one instance Tyco took steps to do just that. The case involves an electronics manufacturer called Raychem, which was acquired by the Bermuda conglomerate on Aug. 12, 1999, for $2.9 billion. And although Raychem remains a single, small component in Tyco's corporate structure--a structure that includes some 2,000 offshore subsidiaries--the evidence might lead one to wonder whether the practice of spring-loading has been more prevalent there than Tyco lets on.

In response to FORTUNE's queries, a Tyco spokesman again staunchly defended the company's accounting. "We do not manipulate earnings and cash flow at the business so we can get some kind of positive benefit after the acquisitions," says executive vice president Brad McGee. "We do not spring-load results." He adds that "there is a very rigorous set of checks that we have internally, where every adjustment must get Tyco corporate approval and approval by our auditors." Furthermore, says McGee, the Raychem case is nothing more than "old allegations." As he pointed out several times in a series of conversations with FORTUNE, in the summer of 2000 the SEC issued a "closing letter"--meaning the agency was closing an investigation without taking any action--after an informal probe of Tyco's accounting practices.

At the time it was acquired, Raychem was a 42-year-old publicly held company with $1.79 billion in annual sales. Based in Menlo Park, Calif., it made wire, cable, heat-shrinkable insulation, and other electronics parts. In 1998, its last year as an independent company, it earned $179 million, but that was down considerably from 1997 earnings of $253 million. It was considered a good place to work, with average employee tenure of around 15 years.

For Tyco, the $2.9 billion acquisition price made Raychem a sizable takeover--though far from the largest. (Just four months before, it had purchased another electronics company, AMP, for $11.3 billion.) For their part, Raychem employees were unhappy about the prospect of being bought by Tyco, with its reputation for cost cutting--so much so that many took to wearing black armbands as a show of silent protest.

But a number of them were upset for another reason. FORTUNE spoke to five former Raychem financial employees as well as a former Raychem consultant, all of whom said that after the deal was announced in May--but before it was completed in August--they were asked by Tyco officials to do such things as accelerate the payment of expenses, hold back the posting of payments received until after the acquisition date--which they refused to do--and overstate reserves. The implied purpose, they say, was to help boost Tyco's post-acquisition cash flow. Even after all this time, these employees spoke with great passion about how uncomfortable Tyco's requests made them.

"I was enraged at the things they were doing," recalls former Raychem assistant treasurer Mical Brenzel--the only one of the six willing to speak on the record. In fact, after reading press accounts of Tice's allegations, Brenzel sent the short-seller a package that included internal e-mails and other documents from the weeks before the merger closed. "You are absolutely correct in surmising that Tyco has systematically used dubious accounting techniques to achieve the results that it presents to Wall Street," she told Tice. "I believe the situation is actually more serious than you have uncovered."

Sixteen years ago, Brenzel had worked in the treasury department of RCA when the electronics company was acquired by General Electric. Back then, recalls Brenzel, "we paid the bill to Lazard Freres for their work advising us after the acquisition closed. My group made this wire transfer, so I know this for a fact." By contrast, she says, Raychem rushed to pay its advisor Morgan Stanley its $18.4 million fee the day before the Tyco transaction closed. (McGee replied that this timing was completely appropriate, since Morgan Stanley was advising Raychem, not Tyco.)

Indeed, these former employees say that with the merger in sight, there appeared to be a sudden rush to pay lots of bills quickly. For example, just two weeks before the acquisition was finalized, Raychem treasurer Lars Larson wrote an e-mail dated July 30, 1999, to seven Raychem employees, as well as to Tyco treasurer Mike Robinson and a Tyco exec named Ed Federman who was on the ground at Raychem, helping to oversee the financial integration of the merger. The subject: "accelerating cash outflow." "At Tyco's request," the e-mail read, "all major Raychem sites will pay all pending payables, whether they are due or not.... I understand from Ray [Sims, Raychem's chief financial officer] that we have agreed to do this, even though we will be spending the money for no tangible benefit either to Raychem or Tyco."

In another payables-related e-mail, this one dated Aug. 3, 1999, Larson wrote, "The purpose of this effort is, at Tyco's request, to cause cash flows to be negative in the 'old' Raychem, and more positive in the new company." Larson declined to comment for this story.

McGee acknowledges that some payables were paid early but says that doing so was part of "normal activities that take place at a company prior to the consummation of a merger." He adds that Juergen Gromer, the Tyco executive with ultimate responsibility for Raychem, remembers his phone "ringing off the hook" with inquiries from suppliers worried they wouldn't get paid. But Brenzel and several other former Raychem employees insist that's "absolute nonsense." As Brenzel puts it: "What suppliers would have been concerned [about being paid] when a smaller company was being acquired by a larger one that had solid credit ratings and a rising stock price?"

The former Raychem employees also say that they were encouraged by Tyco to overstate reserves, which are supposed to be created to cover anticipated losses. The creation of a reserve is an immediate hit against earnings. But if reserves wind up being too high, they can be reversed at some point in the future, helping earnings. As long as there is a good rationale for the amount being put in reserve, the practice is allowed, but if the reserves are intentionally overstated, then the company is violating SEC rules.

One former Raychem division controller recalls how a Tyco official specifically discussed inflating reserves. "She would literally ask, 'How high can we get these things. How can we justify getting this higher?'" The employee, who asked not to be named and who maintains that he quit because he was "revolted" by what he was asked to do, says he personally inflated reserves for such items as workers' compensation, medical insurance, and pensions by at least $10 million.

Yet another accusation of inflated reserves comes from the head of an outsourcing firm employed by Raychem, who also requested anonymity. The firm managed some $5 million worth of Raychem inventory, some of which was supposed to be covered by a reserve fund in the unlikely event that the inventory no longer had a useful life after the merger. Given that many items--including things like gloves, light bulbs, grease, and Band-Aids--would have a useful life for many years, the executive recommended a $1.5 million reserve, although he told FORTUNE that "the reserve could be increased to as high as $1.8 million and still be defensible." In the end, however, he was told that the entire $5 million was reserved.

Tyco would not respond directly to the reserve issue. "To dignify inaccurate allegations with a point-by-point rebuttal is something we're not going to continue to do," says McGee, "especially when we don't have all the facts or the context--nor do I think you do--surrounding specific incidents you mention."

In December 1999, some four months after the Raychem acquisition, and in the wake of Tice's allegation, the SEC began an informal probe of Tyco's accounting practices. It is that inquiry that resulted in the "closing letter" seven months later--which Tyco has since trumpeted as proof that the company did nothing wrong. But one former Tyco employee says that, in fact, Tyco backed away from some of its aggressive moves once it learned that the SEC was investigating. (Under the rules, a company usually has up to a year to finalize the accounting of an acquisition.) One example: According to that source, Tyco wanted to pay bonuses to people who were slated to be fired but had agreed to stay on for a short time after the merger to help with the transition. Though accounting rules are clear that such bonuses should be treated as an expense to Tyco, Federman was allegedly pushing to have them included in a merger charge--which would not affect earnings. But once it was clear that the SEC was looking into Tyco, says this source, Federman "did a 180-turn on this." (McGee says that even if Federman had pushed for such a move, "it would never have passed the corporate litmus test." Federman, who is no longer with Tyco, declined to return FORTUNE's phone call.)

It is impossible to know, of course, why the SEC ended its probe. The agency won't comment. It is quite likely that the SEC decided that Tyco's accounting actions didn't violate the law. But it is also true that aggressive accounting wasn't the issue that it has since become. Spring-loading, says Charles Mulford, professor of accounting at the Georgia Institute of Technology, "is creative accounting within the boundaries of GAAP. But it's contrary to shareholders' interests because you're forgoing interest on money and using shareholders' funds for the non-interest-bearing purpose of boosting operating cash flow." Which is to say: For investors, it feels like stormy weather.

REPORTER ASSOCIATE Lisa Munoz

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