The Lucent Accounting Scandal Essay Example

its fourth fiscal quarter ended September 30, 2000, was much worse. Owing to such accounting irregularities, Lucent announced that it would have to adjust $679 mn from the revenue figures for the quarter.

These irregularities later resulted in litigation, penalties, sacking of key top officials and an adverse image for Lucent. Commenting on the fiancial mess Lucent was in, Paul Silverstein, analyst with Robertson Stephens Inc. said, "Lucent is like a large battleship with gaping holes in its superstructure. It can't be turned quickly, and the holes can't be repaired overnight.

Background Note

In 1996, as a part of its restructuring programme, AT&T spun-off its systems and technology units along with Bell Laboratories to form a new company named "Lucent Technologies Inc." Lucent had its headquarters in Murray Hill, New Jersey, US. Lucent was a global leader in telecommunications equipment and manufactured products used in building communications network infrastructure. The company also made communications and network management software and provided a wide range of services. Its copper line transmissions and switching, wireless and optical gear was used in core telephony and data networks worldwide. It provided wireline and wireless products to leading telephone companies and other communications service providers.

Many of Lucent's products were developed by the research and development unit of Bell Laboratories. Until January 2000, Lucent had been a choice investment bet for investors. Historically, Lucent posted better first fiscal quarter results due to the strong demand for its products by its customers. However, the Lucent's announcement on January 06, 2000, that its revenues for the first quarter in the fiscal 2000 would be 20 per cent less compared

to the first quarter in fiscal 1999, came as a rude shock to investors.

However, financial analysts, who had been closely observing Lucent's balance sheet, were not surprised by the company's poor financial performance.

They felt that though Lucent was lagging behind its competitors in technological innovations, the technological obsolescence of Lucent's products and burgeoning competition had little to do with the fall in the company's revenues...

The Class Action Suit Though Lucent's difficulties began in January 2000, the company was in deep trouble by May 2004. The SEC charged Lucent for misrepresentation of accounts and the consequent misguiding of investors. For this, Lucent had to pay a fine of $25 mn to the SEC.

The January 2000 declaration by Lucent that its financial results for the first quarter of fiscal 2000 would be much lower than its earlier forecast created an uproar among investors. During late 1999, Lucent had forecast higher revenues for the company.

But a contradictory announcement after a few weeks was beyond the comprehension of many investors. They alleged that Lucent intentionally misled investors regarding its financial postion. Relying on the initial forecast, the public had invested enthusiastically in the company's stocks during late 1999. As a result, Lucent's share price rose to an all time high of $84.00 on December 09, 1999.

Charges of Accounting Fraud

The speculation regarding SEC's probe into Lucent's accounting practices came to an end when in late 2000, SEC began a formal investigation of the same. After Lucent failed to co-operate with SEC's probe into whether it had improperly recognized revenues, SEC filed charges against Lucent and ten

of its top executives. These executives were held responsible for Lucent's violation of federal securities laws. Apart from voluntary announcements of 'wrong revenue recognition' by the company, SEC identified several violations of Generally Accepted Accounting Principles (GAAP) by Lucent.

The charges were made for a $1.5 bn accounting fraud. The SEC alleged that Lucent had fraudulently and improperly recognized approximately $1.148 bn of revenues and $470 mn in pre-tax income in the fiscal year 2000 (October 01, 1999 to September 30, 2000) in violation of GAAP (Refer Exhibit II for the financial statements of Lucent in 1999 and 2000).

The Result Lucent and three individual defendants - William Plunkett, Deborah Harris and Vanessa Petrini - agreed to settle matters without admitting or denying the SEC allegations. In March 2004, Lucent agreed to pay a $25 mn fine, the largest fine ever levied by SEC against a company for refusing to co-operate. SEC claimed that Lucent had failed to cooperate in its regulatory investigations. In addition, SEC claimed that Lucent's officials made statements that misled the public about its investigation.

Apart from paying the fine, Lucent consented to the SEC judgement that charged it with violations of federal securities laws, poor internal control provisions & reporting and improper maintainance of books and records. Plunkett, Harris and Petrini too consented to a similar judgment and also to knowingly circumventing internal controls of the SEC and aiding and abetting violations of provisions of reporting, books and records and internal controls laid out in the federal securities laws (Refer Exhibit IV for relevant sections of the Securities Exchange Act, 1934 dealing with the said offenses).