The Lucent Accounting Scandal


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Case Details:

Case Code : FINC039
Case Length : 14 Pages
Period : 1999 - 2004
Pub. Date : 2005
Teaching Note :Not Available
Organization : Lucent
Industry : Telecom
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

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 series of events which led the company into trouble were:

MISREPRESENTATION OF FINANCIAL STATUS

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)...

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