Revenue-Recognition Problems in the Communications Equipment Industry

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9-107-025 REV: AUGUST 23, 2007 PAUL HEALY Revenue-Recognition Problems in the Communications Equipment Industry On November 21, 2000, Lucent Technologies announced that it was revising its fourth-quarter results as a result of revenue-recognition problems discovered by its auditors during the year-end financial review. The revision lowered revenues by $125 million and earnings per share by 2 cents from 18 cents. In response, Lucent’s stock price fell by 16%, to $17.56. One month later, on December 22, Lucent announced that after a more comprehensive review, revenues for the fourth quarter would need to be adjusted downward by $679 million, to $8.7 billion, and that earnings per share would be revised from the initially predicted 18…show more content…
In October, Richard McGinn, its chairman and CEO, was replaced by former CEO Henry Schacht. Exhibit 2 shows key news events for Lucent during 2000. Lucent attributed the revenue revisions affecting fiscal 2000 (its fiscal year ended on September 30) to a variety of factors. The initial $125 million adjustment was due to “misleading documentation and incomplete communications between a sales team and the financial organization with respect to offering a customer credits in connection with a software license.”1 The company stated that the recorded sale did not meet its revenue-recognition rules. As a result, one employee was fired, and disciplinary action was taken against several others. In subsequent revisions announced on December 22, Lucent took back $452 million in equipment that had been sold to systems integrators and distributors but not been passed on to customers because of their weakened financial condition. Lucent noted that in “verbal agreements” it had agreed to take back the equipment, and it resolved to fulfill this commitment to preserve customer relationships. Also, the company discovered that sales teams had verbally offered credits to customers for use at a later date to help secure fourth-quarter sales. It decided to reflect the credits as expenses in the fourth quarter, reducing revenues by $74 million. Finally, revenue had been
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