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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"In their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses, Lucent officers improperly granted and/or failed to disclose, various side agreements, credits and other incentives made to induce Lucent's customers to purchase the company's products. In carrying out their fraudulent conduct, the defendants violated and circumvented Lucent's internal accounting controls, falsified documents, hid side agreements with customers, failed to inform personnel in Lucent's corporate finance and accounting structure of the existence of the extra-contractual commitments or in some instances took steps to affirmatively mislead them." 1

- Securities Exchange Commission2 Chargesheet, Accounting and Auditing Enforcement Release No. 2016.

Introduction

On January 06, 2000, the headlines of several financial dailies in the US read, "Lucent declares that revenues would be lower than expectations." "Class action suit3 against Lucent for making misleading financial statements." "Why Lucent fell." "Whither Lucent" and so on.

For the first time since 1996, the year when the US-based Lucent Technologies Inc. (Lucent) was hived off as a seperate entity, the company acquired the dubious distinction of making news for all the wrong reasons.

Things got worse as time passed and snowballed into a series of class action litigation, investigation into the accounting practices of Lucent by the Securities Exchange Commission (SEC), $25 mn fine and loss of reputation.

It was a painful transition for Lucent from being a favorite among investors to a company steeped in scandal and litigations.

If the announcement in January 2000 regarding revenues falling short of expectations was bad for the company, the announcement in late 2000, that there was an accounting irregularity of $125 mn revenues in 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.4 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."5

The Lucent Accounting Scandal - Next Page>>

1] "SES charges Lucent Technologies Inc. and ten defendants for a $1.1 bn accounting fraud," www.sec.gov, May 17, 2004.

2] The SEC of US was formed with an objective to protect investors and maintain the integrity of the securities markets. The SEC also oversees other key participants in the securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds and public utility holding companies. The SEC is concerned primarily with promoting disclosure of important information, enforcing the securities laws, and protecting investors who interact with these various organizations and individuals.

3] Class Action suit is a legal device allowing a group of individuals with a claim against a company or an individual to join together as plaintiff's in a single suit.

4] Founded in 1978, Robertson Stephens is a leading full-services investment bank in the US focused exclusively on growth companies. The firm provides a comprehensive set of investment banking products and services, including equity underwriting, sales & trading, research, M&A advisory, convertible securities, private capital, equity derivatives, and corporate and executive services.

5] Steve Rosenbush and John Shinal , "The downfall.... that began," BusinessWeek, October 23, 2000.

 

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