LUCENT TECHNOLOGIES INC.

Lucent Technologies is North America's leading maker of telecom equipment and software,
including switching and transmission equipment and business communications systems.
Lucent Technologies started trading publicly in 1996 with an initial public offering that was, at the
time, the largest in domestic history (Hayes). In December 1999, Lucent's stock reached a high of $77.78
and was the nation's fourth most widely held stock (Romero and Atlas). But by July 2001, Lucent's stock
was trading at $6.43, the SEC was investigating its accounting practices, and several former, high-level
managers had been sanctioned by the SEC or were under criminal indictment for wrong-doing while at
Lucent (Romero and Atlas).
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 separate 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 million 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 million
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
million 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 financial 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.

PROBLEM

Accounting fraud totaling more than 1.1 billion dollars

CAUSES

1. Charges of Accounting Fraud

Due to fraudulently and improperly recognized revenue and pre-tax income in violation of
generally accepted accounting principles ("GAAP") during its fiscal year 2000. The plaintiff SEC
(Securities and Exchange Commission) alleged that Lucent improperly overstated its pre-tax income that
fiscal year by sixteen percent and Lucent prematurely recognized $511 million of revenue and $91 million
in pre-tax income in quarterly results during Lucent's fiscal year 2000. The remaining $637 million in
revenue and $379 million in pre-tax income should not have been recognized during Lucent's fiscal year
2000.

Also SEC alleges that Lucent's violations of generally accepted accounting principles (GAAP)
were due to the fraudulent and reckless actions of the named individual defendants, officers, executives and
employees of Lucent. And, the GAAP violations were also the result of deficient internal controls which
led to numerous accounting errors by others.
 2. Earnings Management

Earnings management occurs when managers use judgment in financial reporting and in structuring
transactions to alter financial reports to either mislead some stakeholders about the underlying economic
performance of the company or to influence contractual outcomes that depend on reported accounting
numbers

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 position. 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 on December 09, 1999.

The restatement consisted of millions of equipment shipped to distributors but never sold, this is
called Channel Stuffing – a deceptive business practice used by a company to inflate its sales and earnings
figures by deliberately sending retailers along its distribution channel more products than they are able to
sell to the public. Lucent officers, executives and employees 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.

EFFECT

The Securities and Exchange Commission today charged 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.

When earnings management activities are detected by market participants, and those incurred
independently of whether the manipulation is detected. Costs associated with detected earnings
management include the negative effect on management’s reputation, the decline in management’s ability
to convey information to financial markets due to these past abuses, and the increase in fees required to
compensate auditors for additional audit work and/or increased audit risk.

SOLUTION

Lucent Technologies Inc. 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 million fine, the largest fine ever levied by SEC against a company for refusing
to co-operate.

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 maintenance of books
and records.
 The responsible authorities seem to be concerned with the consequences that earnings management
can bring to the economy. On July 22, 2002, after the recent accounting scandals, Business Week published
several government reform proposals that were likely to come true there must be an independent accounting
board; a more muscular SEC; CEO/CFO certification; shareholder approval on stock options award; auditor
independence; more outside directors and a curb on insider sales of stocks.

Since the SEC identified abusive earnings management as a primary target of its enforcement
actions, the accounting profession and the SEC have taken steps to improve the quality of financial reporting.
The SEC has issued Staff Accounting Bulletins that (1) discuss the appropriateness and application of
materiality in financial reporting, (2) discuss the appropriateness and disclosure of acquisition-related
reserves, and (3) reiterate existing GAAP with respect to revenue recognition. The accounting profession
has participated in panels and on committees to discuss how auditors, audits, and audit committees can be
more effective in uncovering abusive earnings management practices.

AS A CONTROLLER

In the case of Lucent Technology, the abusive earnings management practices were initiated at the
top management, and eventually involved high-level managers and their subordinates. The result of their
abusive earnings management activities that took place over an extended period of time escalated from
questionable and improper revenue recognition practices to other forms of earnings management.

That is why the importance of maintaining corporate integrity without succumbing to the
temptation of short-term benefits should be followed. Make an analysis of the issue of corrupt/unethical
business practices and lack of good corporate governance, and the effect of the above on a company's
financial status and image had to be regulated.

Make an additional audit effort influenced by the auditors’ risk assessments – including their
assessments of management’s motivations (potentially at many levels of an entity) to manage earnings and
meet the expectations of the financial community or of higher levels of management – and their
understanding and tests of internal control.

Routine examination and reconciliation of transaction records to the books is required to verify the
accuracy of the records, the appropriateness of the transactions, and their compliance with policy.

The provisions of the laws with regard to finance-related scandals and the rigorous consequences
for misleading the investors should always be in practice and discussion of the role and responsibility of
the senior executives, the board of directors and the external auditors and the nature and extent of the failure
to avert the situation needs to be carried out.