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Lucent Settles SEC Enforcement Action Charging the Company with $1.1 Billion Accounting Fraud For A $25 Million Slap

The Securities and Exchange Commission today announced in a press release and a litigation release that it was charging in a complaint Lucent Technologies Inc. with securities fraud, and violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC also charged nine current and former Lucent officers, executives and employees, and one former Winstar Communications Inc. officer with securities fraud and aiding and abetting Lucent's violations of the federal securities laws. The SEC's complaint alleges that Lucent fraudulently and improperly recognized approximately $1.148 billion of revenue and $470 million in pre-tax income during its fiscal year 2000. Lucent get's off with a $25 million slap. Ouch!!!

According to the SEC Lucent's penalty for its failure to cooperate.

Throughout the investigation, Lucent provided incomplete document production, producing key documents after the testimony of relevant witnesses, and failed to ensure that a relevant document was preserved and produced pursuant to a subpoena. As a result, the staff's ability to conduct an efficient and comprehensive investigation was impeded.

After reaching an agreement in principle with the staff to settle the case, Lucent's former Chairman/CEO and outside counsel agreed to an interview with Fortune magazine. During the interview, Lucent's counsel characterized Lucent's fraudulent booking of the $125 million software pool agreement between Lucent and Winstar as a "failure of communication" thus denying that an accounting fraud had occurred. Lucent's statements were made after Lucent had agreed in principle to settle this case without admitting or denying the allegations concerning, among other things, the Winstar transaction. Lucent's public statements undermined both the spirit and letter of its agreement in principle with the staff.

After reaching an agreement in principle with the staff to settle the case, and without being required to do so by state law or its corporate charter, Lucent expanded the scope of employees that could be indemnified against the consequences of this SEC enforcement action. Such conduct is contrary to the public interest.

Lucent also failed over a period of time to provide timely and full disclosure to the staff on a key issue concerning indemnification of employees. Failure to provide accurate and complete disclosure to the staff undermines the integrity of SEC investigations.

But Hey! It cost them only $25 million to falsely recognize revenues of over $1 billion. Such a deal!

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Reader Comments (1)

The present level of scandals does not surprise me that much. There are many ways to manipulate financial reports. There are plenty of incentives to promote aggressive accounting. Market pressure stemming from analyst reviews often encourages executives to engage in fraudulent activities. I hate to err on the side of negativism, but personal greed is what drives the train. There are other forces that drive and even promote such behavior. In highly competitive markets it is no longer a business strategy that gives a company a competitive advantage but the accounting policies.

All jokes aside, pressure to “meet numbers” comes from a stock price movement. As long as executives’ compensation packages are tied to the stock performance, there will be an undue pressure to influence the stock price by any means possible.

So, in effect, do stock compensation plans and profit sharing distributions help to create an environment where top management feels pressure to maximize the performance of their companies?

Currently, there is a debate in the accounting profession about how best to value stock options awarded to employees as part of their compensation. The FASB is now investigating the use of the binomial method of valuing these options because the Black-Scholes method returns higher values of these options (from the article “Forget Black-Scholes” in the May 2004 issue of CFO). The FASB is working on a draft exposure for a new rule that would recommend the binomial method over the Black-Scholes method. It appears that once the final rule is published, there would be two methods for calculating the value of the same item. GAAP does allow for some latitude in accounting practices. And if there exists more than one method for determining the value of a transaction, management will normally select the easiest to implement that provides for the least increase in cost or the highest increase in net income.

I believe that it is the auditors’ job to communicate their findings concerning the fair presentation of management’s assertions in the financial statements to the users of financial statements. Were the Lucent Technologies auditors sleeping or were they too busy counting money on lucrative consulting services contracts so that they failed to uncover the cover-ups of the executives’ rear-ends?

May 18, 2004 | Unregistered CommenterNumber-cruncher

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