FINC/039

IBS Center for Management Research

The Lucent Accounting Scandal

This case was written by K.Yamini Aparna, under the direction of Vivek Gupta, IBS Center for Management Research. It was
compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation.

© 2005, IBS Center for Management Research. All rights reserved.

To order copies, call +91-9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org

www.icmrindia.org

Licensed to use for IBS Campuses only.

Sem I, Class of 2020-2022.
 FINC/039

The Lucent Accounting Scandal

“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

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.

Licensed to use for 1IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

BACKGROUND NOTE

In 1996, as a part of its restructuring programme, AT&T6 spun-off its systems and technology
units along with Bell Laboratories7 to form a new company named “Lucent Technologies Inc.”
Lucent had its headquarters in Murray Hill, New Jersey, US.
Lucent was a global leader in telecommunications equipment and manufactured products used in
building communications network infrastructure. The company also made communications and
network management software and provided a wide range of services. Its copper line transmissions
and switching, wireless and optical gear was used in core telephony and data networks worldwide.
It provided wireline and wireless products to leading telephone companies and other
communications service providers. Many of Lucent’s products were developed by the research and
development unit of Bell Laboratories.
Until January 2000, Lucent had been a choice investment bet for investors. Historically, Lucent
posted better first fiscal quarter results due to the strong demand for its products by its customers.
However, the Lucent’s announcement on January 06, 2000, that its revenues for the first quarter in
the fiscal 2000 would be 20 per cent less compared to the first quarter in fiscal 1999, came as a
rude shock to investors.
However, financial analysts, who had been closely observing Lucent’s balance sheet, were not
surprised by the company’s poor financial performance. They felt that though Lucent was lagging
behind its competitors in technological innovations, the technological obsolescence of Lucent’s
products and burgeoning competition had little to do with the fall in the company’s revenues. In
fact, the company’s quarterly financial statements for the year 1999 showed excess investments in
inventory and accounts receivables.
Inventory and accounts receivables growing faster than sales meant trouble for a manufacturing
company like Lucent. Huge quantities of inventories were depreciating in value, sitting idle in
warehouses. Analysts commented that the balance sheet reflected such inventory as an asset but in
reality it was a liability as a huge amount of money was locked up in inventories. The company had to
pay warehouse rents, which was another unproductive expenditure. Similarly, high amount of
receivables reflected sales, which had been recorded in the financial statements, but for which cash had
not been received. So, yet again, a large amount of cash was locked in book entries (Refer Table I for
the quarterly growth rate of Lucent’s sales, inventory and receivables for the fiscal year 1999).
Table I
Lucent – Key Financial Indicators (1999)
(In percentage)

Particulars Quarter 4 Quarter 3 Quarter 2 Quarter 1

Sales growth 23 22 33 6
Inventory Growth 54 74 51 45
Receivables Growth 41 64 57 46
Source: www.fool.com.

6
AT&T (formerly known as American Telephone and Telegraph) was founded in March 1885, to run the
first long-distance telephone network in the US. It provides voice, video, data and Internet
telecommunications services to businesses, consumers and government agencies. For the financial year
ending December 31, 2003, the company recorded revenues of $34529 mn and a net income of $1865 mn.
7
In 1925, AT&T created a new research and development unit called Bell Telephone Laboratories,
commonly known as Bell Labs. It conducted pioneering research and developed radio astronomy, the
transistor, the photovoltaic cells, the Unix operating system and the C programming languages. In 1996,
AT&T spun off Bell Labs, along with most of its equipment-manufacturing business.

Licensed to use for 2IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Lucent’s finance department failed to realize the implications of the unhealthy increase in
inventory and receivables. The problems were compounded by Lucent’s failure to foresee shifts in
customer purchases of optical networking products and its inability to meet demand. There were
also capacity and deployment issues related to these and other products. Adding to the woes,
Lucent had incurred significant debt in its efforts to acquire several companies8. By early 2000,
Lucent’s long-term debt had mounted up to $4 bn.
Lucent’s management announced that all business and financial management related problems
would be sorted by the end of March 2000. Unfortunately, things did not turn out as expected.
When all other companies in the optical networking industry were doing well, Lucent announced
in October 2000 that its revenues from optical networking products were down by five per cent.
While competitors like Nortel Networks9 and Cisco Sytems10 increased sales by 34 per cent and 53
per cent respectively, Lucent’s sales fell by 10 per cent in the fiscal 2000. Lucent continued to
incur losses and stock prices nosedived from a high of $63.22 in 1999 to a low of $0.58 in 2002
(Refer Exhibit I for Lucent’s stock preformance).

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 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.
The investors felt cheated by the January 2000 announcement almost immediately after the
company’s promise of better results in December 1999. On January 07, 2000, a class action law
suit was filed againt Lucent in the US District Court of New Jersey, on behalf of all investors who
purchased the common stock of Lucent between October 27, 1999 and January 06, 2000 inclusive
of the “Class Period.”11
The complaint charged Lucent and some of its officers with violation of US federal securities
laws by misrepresentation of company’s business, earnings and financial status as well as its
growth potential. The complaint further alleged that as against the rosy picture painted by Lucent

8
During the period 1996 and 2001, Lucent had completed 38 acquisitions totaling more than $46 bn,
including a $24 bn purchase of Ascend Communications.
9
Founded in 1895, Canada-based Nortel Networks serves both service provider and enterprise customers in
more than 150 countries. It delivers innovative technology solutions encompassing end-to-end broadband,
Voice over IP, multimedia services & applications and wireless broadband.
10
Founded in 1984, Cisco Systems is the global leader in networking solutions with more than 34,000 employees
worldwide. Cisco’s hardware, software and service offerings are used to create Internet solutions.
11
“Class period” is the time frame during which it is believed the alleged fraud or other securities law
violations artificially inflated the price of a stock. Only those persons who purchased stock during this
period are included in the class action suit. The class period is initially determined by plaintiff's counsel
after extensive research and investigation. Sometimes, the class period changes during the course of the
litigation based on additional information uncovered during the discovery process.

Licensed to use for 3IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

during the Class Period, the company’s profit margin was declining, product prices were steadily
increasing and it had failed to supply products in sufficient quantities to meet customer demands.
The news of a class action suit against Lucent led to a fall in its share price to $52.19.

IRREGULARITIES IN FINANCIAL STATEMENTS

In November 2000, Lucent witnessed a serious blow to its financial credibility when the company
declared that its internal audit had identified some revenue affecting items and that $679 mn would be
adjusted for the fourth quarter of the fiscal 2000. In a press release dated November 21, 2000, Lucent
announced that ‘it had identified a revenue recognition issue impacting approximately $125 mn of
revenues in its fourth fiscal quarter ended September 30, 2000.’ Inflated revenues were recorded
because of some irregularities in the financial statements, which came to light during the internal audit.
After this, Lucent initiated a review by an outside counsel and auditors and informed the SEC.
Following the financial and operational review, Lucent issued another press release dated
December 21, 2000, that a significant loss was expected for the first quarter of fiscal 2001 and that
it would adjust $679 mn in revenues from the fourth quarter in fiscal 2000 (Refer Table II).
In the first quarter of 2000, 18 class action complaints were filed against Lucent and its officers
and the actions were consolidated as “Lucent I.” But after the press release in November and
December 2000, a number of other class action complaints were filed against Lucent, which were
classified as Lucent II. The lead plaintiff12 of the class action suit (Lucent I) also filed second, third
and fourth amended consolidated complaints.
On the basis of subsequent evidence of further financial mismanagement and in response to the
new class action complaints, the class period was extended from 11 weeks to 14 months (from
October 26, 1999 and December 21, 2000). On December 26, 2000, the court entered an Order
consolidating the “Lucent. II” complaints with the “Lucent I” action.
Table II
Summary of the Transactions Requiring Adjustments
(In $ mns)

No. Item Amount

1 Misleading documentation and incomplete communications between a sales 125
team and the financial organization with respect to offering customer credits
in connection with a software license disregarding revenue recognition
procedures.
2 Two other cases in which the sales teams had verbally offered credits to be 74
used at a later date.
3 Revenues had been recognized from the sale of a system that had been 28
incompletely shipped.
4 Decision to take back an equipment that had previously been sold to certain 452
systems integrators & distributors, but not utilized or passed on to customers
due to changes in business strategies and weakening of emerging service
provider market.
TOTAL 679
Source: www.lucent.com.

12
Under an April 27, 2000 Order of the District Court of New Jersey, the Employer-Teamsters Locals 175
& 505 Pension Trust Fund was appointed as the provisional Lead Plaintiff. Thereafter, a sealed bid
auction was held to select Lead Counsel and a law firm was appointed Lead Counsel by the court.

Licensed to use for 4IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

There were rumours of an SEC investigation into Lucent’s accounting practices, which further
damaged the company’s credibility. On February 09, 2001, the Wall Street Journal (WSJ) reported
that the SEC would launch a formal investigation into the alleged fraudulent accounting practices of
Lucent. In response to the news that “Lucent expected SEC investigation,” the company spokesperson
told the press that Lucent had already reported violation of accounting norms to the SEC on its own
after the suspect numbers were discovered in the company’s internal audit13.
Lucent condemned the WSJ news item and stated that since the reporting of the company to SEC
was public, “there was no new news” regarding a formal investigation into the accounting
practices of the company by SEC. The SEC neither confirmed nor refused the existence, or
disclosed the status of the alleged investigations.
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)14 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). The GAAP violations were made by Lucent in at least 10 separate transactions
in fiscal year 2000. Lucent violated GAAP by recognizing revenues on these transactions in
circumstances:
• Where it could not be recognized under GAAP; and
• By recording revenue earlier than was permitted under GAAP.
Altogether ten top officials of Lucent were found involved in transactions that breached accounting
practices (Refer Exhibit III for the name and designation of the officials involved), investigation reports
revealed that all irregularities were committed by deceiving the finance department. Misleading
information was given and sometimes, crucial information was withheld deliberately.
The fraudulent transactions were first committed by Nina Aversano (Aversano) and Leslie Dorn
(Dorn) between October and December 1999. They orally granted certain rights and privileges15
regarding a distribution agreement to the effect that Lucent would accept a return of a product if
the distributor failed to sell it to end-customer. Aversano and Dorn protected distributors from
losses in case they were unable to sell products, by granting unrestricted product substitutions,
pricing concessions and holding cost reimbursements.
In this case, Lucent recognized revenue upon delivery of stock to distributors, whereas it should
have been recognized only on actual receipt of money. The US GAAP prohibited recognition of
revenue in financial statements unless and until it was realizable and earned. In violation of these

13
“Lucent responds to WSJ report,” Lucent’s Press Release, February 09, 2001.
14
US GAAP are the Generally Accepted Accounting Principles used by the companies based in USA or
listed at Wall Street. US GAAP comprises a massive volume of standards, interpretations, opinions and
bulletins and are developed by the Financial Accounting Standards Board (FASB), the accounting
profession (AICPA) and the SEC. US GAAP is a combination of authoritative standards set by policy
boards and the accepted ways of doing accounting.
15
This undue protection was given to Anixter International Inc. and Graybar Electric Company, Lucent’s
two top distributors.

Licensed to use for 5IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

standards, Lucent improperly recognized revenue despite substantial evidence that the recorded
amount was not realizable. Aversano and Dorn did not inform the Chief Financial Officer (CFO)
of the existence of verbal distribution agreements and of recognition of revenue in violation of
GAAP. Moreover, on some occasions, Aversano and Dorn deliberately misrepresented facts to
personnel of the finance department.
When one distributor requested Aversano to put his rights to return the stock into writing, she told
him that she could not do so but executed a Letter of Understanding (LoU). Reportedly, Lucent’s
chief accountant had seen drafts of the LoU and had told Aversano that she could not agree to such
commitments to distributors. When specifically asked about the details, Aversano deliberately
withheld the fact that she granted special rights to distributors orally. In addition, Aversano even
executed a management representation letter to the effect that she did not make any kind of side
agreements or extra-contractual commitments to distributors.
As a result of the duo’s fraudulent conduct, Lucent recognized revenue at the point of sale itself
and filed materially misstated financial statements with the SEC. Ultimately, because of the
impermissible commitments made by Aversano and Dorn, Lucent had to take back $352 mn worth
of inventory, which distributors were unable to sell.
In September 2000, William Plunkett (Plunkett), with the help of Deborah Harris (Harris) and
Vanessa Petrini (Petrini), negotiated a sale of software worth $135 mn with David Akerman of
Winstar16. In the deal, only $10 mn revenue was lawfully recognizable but the entire amount of
$135 mn was showed as revenue in the financial statements before actual receipt. Plunkett was
pressurized by the senior management, including Aversano, to show revenues and, therefore, he
entered into side agreements with Ackerman. The side agreements were in relation to the sale of
software to grant further credits and rights to Winstar, but were shown as different transactions so
that the value of the side agreements would not be deducted from the $135 mn transaction.
In order to establish that the side agreements were unrelated to the software sale, Plunkett, Petrini
and Harris created post-dated letters and documents. Only Plunkett and Petrini had the original set
of false documents. No copies were made and nobody outside the sales team knew of their
existence. The sales team did not divulge the truth in spite of being specifically asked by Lucent
accountants whether any credits, discounts or incentives were offered to Winstar. Because of their
misconduct, Lucent recorded $125 mn of additional revenues.
In another transaction, Lucent and AT&T Wireless Services (AWS) began negotiations for a new
pricing model under which AWS would pay Lucent for the entire set of data/voice equipment once
they were connected rather than for individual pieces of equipment that made the connection.
While the negotiations on the pricing model were still going on, Jay Carter (Carter) authorized his
subordinates to enter into verbal agreement with AWS officials to the effect that the new pricing
model would be applied retrospectively for transactions taking place between the start and
completion of negotiations, called the interim period.
It was decided that as per the verbal side agreements, the pricing differences between the old and
new model for transactions during the interim period would be adjusted through credits. During
the interim period, Lucent provided AWS with switching equipment valued at $53 mn under the
old pricing model without invoicing it. Carter had to recognize the revenue on the equipment and,
therefore, invoiced the equipment under the old pricing model and requested AWS for a
purchasing order. AWS gave the purchase order but with the condition that Lucent would provide
credit for the invoiced amount and that AWS would pay for it under the new pricing model.
The price AWS would ultimately pay for the equipment was not yet determined as the negotiations
on the new pricing model were inconclusive. Thus, Lucent could have no certain expectation that
it would collect $53 mn for the switching equipment. Still, Lucent recognized $53 mn as revenue

16
WinStar Communications Inc. provides a broad suite of integrated broadband communications and
information services.

Licensed to use for 6IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

and operating income, thereby violating GAAP relating to realizable criterion for revenue
recognition. Hayes-Bullock, the CFO for Lucent’s AT&T customer business unit, was aware of
these oral side agreements but she deliberately misled Lucent’s Chief Accountant about their
existence and nature. She drafted a letter to the Chief Accountant falsely suggesting that there were
no side agreements with AWS.
In another transaction with BellSouth Telecommunications17 for the sale of software, John Bratten
agreed in September 2000 to provide BellSouth with $20 mn credit and a two per cent price
discount (valued at $1 mn) as an incentive to enter a pooling agreement18. However, he did not
notify Lucent’s CFO regarding the credit and discount offers. Bratten, along with Charles J. Elliott
(Elliott), even executed a false letter stating that the offer was in no way related to the pooling
agreement. When questioned by the Chief Accountant about the offer, both Bratten and Elliott
maintained that the credit and discount were not connected to the pooling agreement and had been
granted to facilitate the execution of a purchase agreement with BellSouth. Due to their
misrepresentation, Lucent included the entire $95 mn as revenues and operating income whereas
Lucent should have actually recorded $74 mn as revenues because of the $20 mn credit and $1 mn
price discount.
Lucent improperly recognized another $58 mn in revenues on the sale of optical networking
equipment to Global Crossing Limited (Global)19. Lucent wrongly characterized it as a “bill and
hold”20 transaction even though it did not fulfil the requirements necessary under GAAP. The
GAAP allowed revenues to be recognized on “bill and hold” transactions where the buyer
requested the transaction on a “bill and hold basis”, and not where the seller induced the buyer to
conduct the transaction as a “bill and hold”. Global agreed to purchase $58 mn worth equipment;
Lucent, however, neither shipped it nor invoiced it but held it in its own warehouse and agreed to
extend its payment terms to allow Global to pay for equipment later. Here Lucent, the seller,
induced the transaction and therefore did not qualify for recognizing the revenue on “bill and hold
basis”. Due to lack of sufficient internal controls, Lucent’s CFO did not notice the irregularity and
recognized the entire $58 mn on bill and hold basis as revenues, violating the GAAP.
In another transaction, Lucent sold equipment valued $90 mn to Lucent Technologies of Shanghai
Limited with unrestricted rights of return. Lucent’s CFO was unaware of the right to return granted
to the seller and recognized the entire $90 mn as revenues and $6 mn as operating income,
violating the GAAP.
In another accounting irregularity, Allegiance Telecom21 (Allegiance) agreed to purchase $28 mn
worth of switching hardware and software from Lucent. On receipt of a letter from Allegiance
regarding the receipt of the hardware, Lucent wrongly recognized the entire $28 mn in revenue
though the letter did not speak of receipt of software or the satisfactory installation of hardware.

17
BellSouth Telecommunications, Inc. is a wholly owned subsidiary of BellSouth Corporation providing
wireline telecommunication services, including local exchange, network access and long distance
services. The company markets its products and services under the brand name BellSouth.
18
The polling agreement obligated BellSouth to pay Lucent $95 mn by April 01, 2001, for software that it
had to select by September 30, 2002.
19
Global provides broadband services to leading organizations across the world. It provides services in two
segments – telecommunications services segment offers a variety of integrated telecommunications
services through global fiber optic network. Installation and maintenance services segment, consisting of
the company’s global marine business, installs and maintains undersea fiber optic cable systems for
carrier customers worldwide.
20
In a ‘bill and hold’ transaction the seller sells equipment to a buyer, bills the customer and then holds the
merchandise for delivery at a later date.
21
Allegiance provides integrated telecommunications services in major metropolitan areas across the US. It
offers voice, data, and integrated communications services (including local, long distance, Internet, data
colocation, web hosting and customer premise equipment sales and maintenance services), integrated
online billing, and a single point of contact for sales and service.

Licensed to use for 7IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

The SEC complaint stated that Lucent’s violations of GAAP were due to the fraudulent and
irresponsible actions of Lucent’s executives and deficient internal controls. The complaint alleged
that the company’s executives were solely driven by profit motive. They tried to meet sales targets
by cirvumventing internal controls, falsifying documents and hiding crucial information from
customers.

THE RESULT

Lucent 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 mn fine, the largest fine ever levied by SEC against a company for refusing to
co-operate. SEC claimed that Lucent had failed to cooperate in its regulatory investigations. In
addition, SEC claimed that Lucent’s officials made statements that misled the public about its
investigation.
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 maintainance
of books and records. Plunkett, Harris and Petrini too consented to a similar judgment and also to
knowingly circumventing internal controls of the SEC and aiding and abetting violations of
provisions of reporting, books and records and internal controls laid out in the federal securities
laws (Refer Exhibit IV for relevant sections of the Securities Exchange Act, 1934 dealing with the
said offenses).
Plunkett also consented to an order permanently barring him from acting as an officer or director
of any public company and paid $110,000 civil penalty. Harris consented to an order barring her
from acting as an officer or director of a public company for five years and paid $100,000 civil
penalty. Petrini agreed to pay $109,505 representing the profits gained as a result of fraudulent
conduct, together with interest of $23,487 and a civil penalty of $60,000.
After these settlements, Patricia F. Russo, the Chairperson and CEO of Lucent said, “Since
bringing this matter to the SEC’s attention, we have addressed these issues with increased controls
and disclosures in our organization. We are closing this chapter in our history, putting it behind us
and focusing on moving our business forward.”22
The dismal financial performance of Lucent continued in the fiscal years 2001, 2002 and 2003.
The company’s revenues declined from $21.29 bn to $8.47 bn. However, Lucent was able to
reduce its losses from $14.17 bn in the fiscal 2001 to $770 mn in the fiscal 2003 (Refer Exhibit V
for the financial statements of Lucent for the fiscal 2001-03). From a high of $60 recorded in late
1999, Lucent’s stock hovered around $10 in late 2004.

22
“SEC Fines Lucent Technologies $25 Million,” www.wjla.com, May 18, 2004.

Licensed to use for 8IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Exhibit I

Lucent’s Stock Performance

Source: www.finance.yahoo.com.

Licensed to use for 9IBS Campuses only.

Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Exhibit II
Lucent – Financial Statements (1999-2000)
(Dollars in mns, except per share amounts)

Particulars/Year ended September 30 2000 1999 Change

OPERATIONS
Revenues $33,577 $29,910 12.3%
Gross margin 14,166 14,802 (4.3%)
Selling, general and administrative 5,573 5,118 8.9%
Research and development 4,007 4,158 (3.6%)
Operating income 4,586 5,526 (17.0%)
Income from continuing operations, net 3,093 3,593 (13.9%)
Earnings per share from continuing
operations — diluted
$0.93 $1.12 (17.0%)

FINANCIAL POSITION
Total assets $48,792 $35,372 37.9%
Working capital 10,613 10,090 5.2%
Shareowners' equity 26,172 13,936 87.8%

OTHER INFORMATION
Capital expenditures $2,701 $2,042 32.3%
Return on assets 8.7% 12.2% (3.5 points)
Debt to total capital 20.0% 29.6% (9.6 points)
Stock price $30 1/2 $64 7/8 (53.0%)
Source: www.lucent.com.

Licensed to use for10

IBS Campuses only.
Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Exhibit III
Lucent’s Executives Involved in Accounting Fraud
• Nina Aversano, Corporate Officer and President of Lucent’s North American Sales and
Service Provider Networks from 1998 to 2000.
• Jay Carter, a Corporate Officer and President of Lucent’s AT&T customer business unit
from July of 1997 to September of 2000, with global responsibility for sales and marketing
of Lucent product to AT&T.
• Leslie Dorn, Lucent’s Vice President of Indirect Sales for North America (distributors)
from November 1998 until December 2000.
• John Bratten, Lucent’s sales Vice-president for the BellSouth region since April 2000.
• William Plunkett, Vice-president for Lucent’s Emerging Service Provider customer
business unit, which included the Winstar account.
• Deborah Harris, Sales Vice-president for the Winstar account within the Emerging Service
Provider customer business unit from August 2000 until October 2001. Harris reported to
Plunkett in September 2000.
• Michelle Hayes-Bullock, Lucent Finance Director with CFO responsibilities for the AT&T
customer business unit from January 2000 to January 2001 and reported to Jay Carter in
September 2000.
• Charles J. Elliott, Lucent Senior Manager with contract management responsibility for the
BellSouth customer team from 1984 until August 2001.
• Vanessa Petrini, Assistant Vice-president for the Winstar Customer Team in September
2000, and reported directly to Harris.
• David Ackerman, an officer of Winstar and Executive Vice-president, Business
Development and Strategic Planning from June 1994 until January 2001. He was
responsible for corporate strategy and business development.
Adapted from www.sec.gov.

Licensed to use for11

IBS Campuses only.
Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Exhibit IV
Relevant Provisions of the Securities Exchange Act (1934)
Section 10: Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of any national securities exchange:
• To use or employ, in connection with the purchase or sale of any security registered on a national
securities exchange or any security not so registered, or any securities-based swap agreement (as
defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors.
Section 13: Periodical and other Reports:
a. Reports by issuer of security; contents:
Every issuer of a security registered pursuant to Section 12 shall file with the Commission, in accordance
with such rules and regulations as the Commission may prescribe as necessary or appropriate for the
proper protection of investors and to insure fair dealing in the security:
• Such information and documents (and such copies thereof) as the Commission shall require to keep
reasonably current the information and documents required to be included in or filed with an
application or registration statement filed pursuant to section 12, except that the Commission may not
require the filing of any material contract wholly executed before July 1, 1962.
• Such annual reports (and such copies thereof), certified if required by the rules and regulations of the
Commission by independent public accountants, and such quarterly reports (and such copies thereof),
as the Commission may prescribe.
• Every issuer of a security registered on a national securities exchange shall also file a duplicate
original of such information, documents, and reports with the exchange.
Section 13(b): Form of report; books, records, and internal accounting; directives:
Every issuer which has a class of securities registered pursuant to section 12 and every issuer which is
required to file reports pursuant to Section 15(d):
• Make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the issuer;
• Devise and maintain a system of internal accounting controls sufficient to provide reasonable
assurances that--
• transactions are executed in accordance with management's general or specific authorization;
• transactions are recorded as necessary (I) to permit preparation of financial statements in conformity
with generally accepted accounting principles or any other criteria applicable to such statements, and
(II) to maintain accountability for assets;
• access to assets is permitted only in accordance with management's general or specific authorization;
and
• the recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting
controls or knowingly falsify any book, record, or account described in paragraph (2).
Section 20: Liabilities of controlling persons and persons who aid and abet violations
a. Joint and several liability; good faith defense
Every person who, directly or indirectly, controls any person liable under any provision of this title or of
any rule or regulation there under shall also be liable jointly and severally with and to the same extent as
such controlled person to any person to whom such controlled person is liable, unless the controlling
person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation
or cause of action.
Source: www.sec.gov.

Licensed to use for12

IBS Campuses only.
Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Exhibit V
Lucent – Financial Statements (2001-03)
(Dollars in mns, Except Per Share Amounts)

Particulars/Year ended September 30 2003 2002 2001

OPERATIONS
Revenues $8,470 $12,321 $21,294
Gross margin 2,652 1,552 2,058
Selling, general and administrative 1,509 3,969 7,410
Research and development 1,488 2,310 3,520
Net business restructuring charges and asset (158) 1,426 10,157
impairments
Goodwill impairment 35 826 ---
Operating loss (222) (6,979) (19,029)
Provision (benefit) for income taxes (233) 4,757 (5,734)
Loss from continuing operations (770) (11,826) (14,170)
Loss per common share from continuing operations $(0.29) $(3.51) $(4.18)
FINANCIAL POSITION
Cash, cash equivalents and short-term investments $4,507 $4,420 $2,390
Total assets 15,765 17,791 33,664
Total debt 5,980 5,106 4,409
8% redeemable convertible preferred stock 868 1,680 1,834
Shareowners' (deficit) equity $(4,239) $(4,734) 11,023

OTHER INFORMATION
Net cash used in operating activities from continuing $(948) $(756) $(3,421)
operations
Capital expenditures 34,500 47,000 1,390
Stock price $2.16 $0.76 $5.73
Source: www.lucent.com.

Licensed to use for13

IBS Campuses only.
Sem I, Class of 2020-2022.
 The Lucent Accounting Scandal

Additional Readings and References:

1. Richey, Matt, Lessons from Lucent, www.fool.com, January 13, 2000.

2. Why Lucent is struggling, BusinessWeek, June 26, 2000.
3. Rosenbush, Steve and Shinal, John, The down fall....that began, BusinessWeek,
October 23, 2000.
4. Weiss, Phil, Lucent at bat, www.fool.com, October 23, 2000.
5. Jander, Mary, SEC knocking on Lucent’s door, February 09, 2001.
6. SEC probe much wide than thought, www.accountancyage.com, February 12, 2001.
7. Weil, Nancy, Lucent shares tumble on report of SEC investigation, www.nwfusion.com,
September 02, 2001.
8. Rosenbush, Steve and Crockett.O. Roger, Lucent: One step forward two steps back,
BusinessWeek, August 04, 2002.
9. Ferranti, Marc and Rohde Laura, Lucent celebrates first profit in three years,
www.computerweekly.com, October 23, 2003.
10. Business in brief, www.washingtonpost.com, March 19, 2004.
11. Smith, Rich, Lucent sings to the feds, www.fool.com, April 07, 2004.
12. Stern, Christopher, SEC charges Lucent employees with fraud, www.technewsworld.com,
May 18, 2004.
13. SEC Fines Lucent Technologies $25 Million, www.wjla.com, May 18, 2004.
14. Belson, Ken, Chairwoman Pulls Lucent Back From The Brink, The New York Times,
May 20, 2004.
15. www.lucent.com.
16. www.lightreading.com.
17. www.securities.stanford.edu.
18. www.wallstreetjournal.com.
19. www.itworld.com.
20. www.computing.co.uk.
21. www.bizjournals.com.
22. www.bankrupt.com.
23. www.sec.gov.
24. www.biz.yahoo.com.
25. www.nyse.com.

Licensed to use for14

IBS Campuses only.
Sem I, Class of 2020-2022.