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Lucent Technologies Essay

1564 words - 6 pages

Introduction Lucent TechnologiesLucent Technology 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). The plunge in stock value (exhibit 1) was primarily the result of a November 21, 2000, announcement in which Lucent said it had to restate its financial statements as a result of an internal investigation revealing accounting irregularities. Lucent's restatement reduced revenues by $679 million (McGough, Bloomberg).As early as June 2000, media attention had begun to be directed towards Lucent's aggressive accounting policies. A Wall Street Journal article in June, 2000 suggested that Lucent Technologies might be engaging in creative accounting practices, noting that Lucent's receivables were rising at 49% while revenues were rising at only 20% (Wall Street Journal).Accounting Policy Reporting objectivesLucent's chief executive Richard McGinn had turned Lucent into a Wall Street star by increasing sales at a double digit pace and was determined to maintain Lucent's growth. Many observers believed that Lucent's sales projections were imposed on sales executives by the chief executive who was intent on maintaining a 20 percent growth rate (Berman and Blumenstein). Don Peterson was appointed the executive vice president and CFO; he reported to CEO Richard McGinn and was accountable for the Corporate Finance Organization. Peterson explained in a 1999 article that revenue targets were attained because stock options were used as motivational tools (William, Hart). Motivation to manage earnings was based on executive compensation for performing well on the stock market. One of Lucent's revenue growth tactics included offering deep product discounts to induce customers to purchase products now instead of delaying these purchases. The short term result of increased current period sales came at the expense of not realizing those sales in successive years. Other tactics designed to increase current period revenues and meet stated sales targets included the extension of generous credit terms to customers. Sometimes payment of principal was deferred for several years with Lucent even financing equipment engineering and installation.Accounting ManipulationLucent had used many aggressive accounting choices to boost its growth. One analyst estimated that Lucent had added about 27 cents a share to its earnings through "deft...

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