Preview

The Lucent Accounting Scandal

Better Essays
Open Document
Open Document
1219 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Lucent Accounting Scandal
The Lucent Accounting Scandal
Abstract
The case discusses the accounting frauds committed at the US-based telecommunications giant, Lucent Technologies Inc. (Lucent) during early 2000. It provides an insight into the ways by which the financial statements were manipulated at Lucent.

It examines the loopholes in the financial management of the company and the price it had to pay for circumventing the provisions of law. The case examines the allegations against Lucent and its officers with reference to the Securities Exchange Act, 1934. Finally, the case throws light on the damage control measures taken up by the new CEO to improve the company's performance and restore investor confidence.
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 suit 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

You May Also Find These Documents Helpful

  • Satisfactory Essays

    After reviewing the case of Lucent Technologies, we discover that the assets for Lucent Technologies suffered a decline between 2003 and 2004. According to the information provided in the case revealing, the current assets in 2003 was 49.4% of Lucent Technologies total assets, whereas the current assets in 2004 decreased to 48.5%. Although, after reviewing the case the percentage of inventory rose from 4.0% in 2003 to 4.8% in 2004. We can then calculate there is about a 20% increase in the total inventory holdings. Also it is apparent that Lucent Technologies entire assets in 2003 was 24% and had a decrease in 2004 to about 20%. This can be measured by the company's cash equivalents and cash.…

    • 627 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    Case Brief

    • 797 Words
    • 4 Pages

    Issues: Can a company be held liable for fraud when they engaged in transactions with a corporation in order to intentionally inflate that corporation’s financial statement, even though there were no public statements concerning those transactions,…

    • 797 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    In cases such as Enron and WorldCom, the authors wanted to see if businesses filing bankruptcy were in direct correlation of fraud of business financial statements by conducting a study. Nogler & Inwon, 2011, p. 68). The results brought to light the fact that the larger the company that filed bankruptcy the more likely that securities fraud litigation and general overstatement of the revenue and assets of the company occurred. (Nogler & Inwon, 2011).…

    • 502 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    The internet bubble that burst in March, 2000 is followed with much larger and more devastating collapse: Telecom. WorldCom’s financial statements were far worse than expectation that would result in stock price fall, downgrading company and most importantly—losing capital to acquire companies. Then CEO and CFO were planning to change the financial statements with mid-level accountants. They thought if the financial statements were better in next quarter, they could cover the change. But things didn’t go according to plan. They had to change the number until the whistle blew.…

    • 1104 Words
    • 5 Pages
    Better Essays
  • Better Essays

    As the case of Excello Telecommunications is reviewed it can be seen that the CFO was facing financial difficulties due to increased competition. In 2010 the earnings estimate was not going to be met and this would have affected the bonuses, stock options, and the share prices of the Excello stocks. After discovering a large sale that was pending until the shipment could be made for the following year the CFO asked the company controller to find a way to capitalize on the sale in the current year so that the budget shortfall could be met. The only way to accomplish the task was to work around the rules of accounting. The intent to find a way around the rules presents possible legal issues. This case can be evaluated by the Sarbanes-Oxley Act and the AICPA and we look at the financial reporting standards and ethics involved.…

    • 1254 Words
    • 6 Pages
    Better Essays
  • Satisfactory Essays

    Sun Micr

    • 301 Words
    • 2 Pages

    Sun Microsystems is a leading supplier of computer related products, including servers, workstations, storage devices, and network switches. In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McNealy offered the following remarks: Fiscal 2001 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still, we finished with revenue growth of 16 percent—and that’s significant. We believe it’s a good indication that Sun continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down—even as they continued to bring exciting new products to market. The statement would not appear to be telling you enough. For example, McNealy says the year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 1. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 2. 1. Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (2nd numerical line from the bottom) for 1998–1999, 1999–2000, and 2000–2001. 2. Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 1998. 3. What is the major reason for the change in the answer for question 2 between 2000 and 2001? To answer this question for each of the two years, take the ratio of the major income statement accounts (which follow Exhibit 1 on the next page) to net revenues (sales). (a) Cost of sales (b) Research and development (c) Selling, general and administrative expense (d) Provision for income tax…

    • 301 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Sarbanes Oxley Act Paper

    • 934 Words
    • 4 Pages

    Vay, D.L.D. (2006). The Effectiveness of the Sarbanes-oxley Act of 2002 in Preventing And Detecting Fraud in Financial Statements. USA: Universal-Publishers.…

    • 934 Words
    • 4 Pages
    Powerful Essays
  • Powerful Essays

    Policy Paper Sarbanes-Oxley

    • 5149 Words
    • 21 Pages

    The corporate scandals in the year 2001 of Enron and WorldCom, where Enron was able to produce fake reports of high profits with false accounting methods and WorldCom, who artificially reduced their expenses to falsely increase in the appearance of their revenues, created a market failure. Major stakeholders such as investors, government,…

    • 5149 Words
    • 21 Pages
    Powerful Essays
  • Satisfactory Essays

    Week 5 Article Review

    • 457 Words
    • 2 Pages

    The authors of the article also conducted a study on whether or not fraud of the financial statements was in direct correlation of businesses filing bankruptcy (Nogler & Inwon, 2011, p. 68) like in the cases of Enron and WorldCom. The results found that the larger the company that filed bankruptcy the more likely that securities fraud litigation and general overstatement of the revenue and assets of the company occurred (Nogler & Inwon, 2011).…

    • 457 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    In the early 20th century many large corporations were guilty of committing scandals and fraudulent activities. Many people today are very familiar with Sarbanes Oxley Act (SOX) of 2002 when the large companies such as Enron, WorldCom, Adelphia, and many others collapsed between 2001 and 2002, and Congress passed SOX also known as the White-Collar Criminal Penalty Enhancement Act of 2002 (Jennings, 2006). To minimize the fraudulent activities done by especially the educated ones such as top executives of the company, Security Exchange Commission (SEC)…

    • 2805 Words
    • 12 Pages
    Better Essays
  • Powerful Essays

    The Sarbanes-Oxley Act

    • 1565 Words
    • 7 Pages

    Many such scandals broke out during the period of 2000-2002, WorldCom, Tyco International, Adelphia, Peregrine Systems were a few to name. These scandals resulted in many investors losing their money, some who had invested their life savings, due to stock price crashes also causing instability in the stock markets. After a series of analysis and discussions, the senate passed a bill call ‘Sarbanes Oxley Act of 2002’.…

    • 1565 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    Discussion

    • 2337 Words
    • 10 Pages

    Public companies feel pressure to report quarterly earnings that meet or exceed analysts ' expectations-after all, failure to meet those expectations can hurt companies ' stock prices. This pressure can lead to practices that sometimes include fraudulent overstatement of quarterly revenue. Any of the improper and unusual revenue-transaction methods used to misstate quarterly revenue also can be used to change annual results. Auditors need to be alert to the whole gamut of warning signs that revenue-recognition fraud may be present.…

    • 2337 Words
    • 10 Pages
    Good Essays
  • Powerful Essays

    In July of 2002, five officials of the Adelphia cable-television company were arrested on the charge of gross corporate fraud conducted by members of the Rigas family. The events which transpired during the Adelphia scandal were some of the most egregious to date with an estimated "$100 million, hiding more than $2 billion in debt the family incured, and lying to the public about Adelphia 's operations and financial condition (Grant and Nuzum, 2004, p. A1)." During the course of the proceedings it was determined that the Rigas family had been plundering corporate funds in a manner very reminiscent of the Enron accounting scandal one year prior. Both of these companies acted in a decidedly un-deontological manner raising the needs of the self-interested few over the desire to act in a fair and equitable manner. It is their decision to act in this egotistical manner which ultimately brought them to this unfortunate outcome. Before analyzing what the Adelphia officers had done wrong, we should first define the boundaries with which we are judging them by.…

    • 1542 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Case 5 & 6 History :Accounting Irregularities at WorldComBernard J. (Bernie) Ebbers from the beginning “was a man who believed in himself and his company” a statement which was best expressed by the way in which he performed duties to his company. WorldCom thus, became the second largest telecommunications…

    • 4546 Words
    • 12 Pages
    Powerful Essays
  • Better Essays

    World Com

    • 530 Words
    • 2 Pages

    The corporate scandal involving WorldCom regrettably illustrates improper cost transfers designed to achieve higher profit levels. WorldCom did not transfer the cost from leases from the balance sheet to the income statement as quickly as they should have. This had the effect of overstating assets on the balance sheet and net income on the income statement.…

    • 530 Words
    • 2 Pages
    Better Essays