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February 9, 2001

Lucent Is Under Investigation By SEC for Accounting Practices
By Dennis K. Berman, Michael Schroeder and Shawn Young, The Wall Street Journal

More Gimmicks, Lies, and Tricks ... Weiss comments

NEW YORK - The Securities and Exchange Commission's enforcement division is conducting a formal investigation into possible fraudulent accounting practices at Lucent Technologies Inc., according to people with knowledge of the investigation.

The probe focuses on whether Lucent improperly booked $679 million in revenue during its 2000 fiscal year, which ended Sept. 30, according to people familiar with the investigation. The telecom-equipment maker, once a highflying spin-off of AT&T; Corp., restated the same revenue in December after conducting its own investigation.

As part of that restatement, Lucent deducted $199 million in credits offered to customers, and $28 million for a partial shipment of equipment. Further, the company took back an additional $452 million in revenue it had sent to its distribution partners but never actually sold to end customers.

According to one person with knowledge of related SEC documents, commission staff are investigating Lucent's procedures for booking sales, in particular its use of "nonrecurring credits," or one-time discounts, given to customers, as well as Lucent's accounting treatment of software-licensing agreements.

The SEC is also looking at how Lucent recognized revenue on sales to its distributors, who may not have sold the products, a practice known as stuffing the channels. Also under examination is the company's use of revenue targets for fiscal 2000.

Lucent's December restatement reduced already-flagging investor confidence in the battered company. Since the company first hinted of financial difficulties with an earnings warning last January, Lucent's stock has lost 77% of its value. Since January 2000, Lucent's market capitalization has dropped roughly $185 billion.

The SEC brings as many as 100 enforcement actions involving accounting-related fraud each year, representing about 20% to 25% of its caseload. A formal investigation must first be approved by the commission itself. Once it has that status, staffers can use legal subpoena power to compel employees, ex-employees and customers to speak.

Two years ago, the SEC made accounting-fraud cases a priority, weighing whether companies intended to deceive shareholders with aggressive financial reporting. Contributing to the rise in accounting-enforcement cases have been Wall Street pressure on financial executives to meet earnings estimates; court rulings and legislation making it harder to sue outside accountants; and greater use of stock options as executive compensation.

Restatements, resulting in earnings swings of tens of millions of dollars, have flourished amid the SEC crackdown on "earnings management" through accounting gimmicks. For example, many SEC probes have focused on one popular form of manipulation: inflating revenues by posting them prematurely or by playing games with inventory.

For years, we've been telling you about the myriad gimmicks, lies, and tricks that companies use to beef up earnings. And even though the SEC is cracking down on earnings manipulators, the examples of companies using "creative accounting" to dress up earnings reports for investors keep piling up. The latest company to come under SEC scrutiny, Lucent Technologies is a prime example of the underhanded tactics that companies employ just to stay afloat -- and what will happen when the truth finally comes out!

Though we won't know the full story on Lucent until the SEC investigation is over, we can tell what has happened in cases where companies have "cooked the books." To boost sales, company execs tell their sales force to give away equipment in exchange for share's of the buyer's stock and book it as a sale. But when the buyers go bankrupt or their stock prices sink into the abyss, the so-called "sales" vaporize into thin air. Or, the company ships products to its distributors and records that as sale -- even when the distributor never sells the item. That's like moving furniture into storage and pretending that you've sold it.

Lucent started back-peddling as early as January 2000, when it announced an earnings warnings -- and kept repeating those warnings and lowering expectations throughout the year. And just when you thought the stock's share price couldn't go any lower, the SEC investigation has sent Lucent's shares tumbling even further. And as for those analysts who said that such a tech bellwether was steal at last week's "low" prices -- well, they're nowhere to be seen.

As the carnage plays out on Wall Street -- and the truth about the earnings lies and tricks becomes fully exposed -- we expect what you'll hear from one analyst after another is nothing but a roaring silence.

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