Revenue-Recognition Problems in the Communications Equipment Industry Essay

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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…
Not surprisingly, most analysts responded negatively to the announcements of Lucent’s revenuerecognition problems. Michael Ching, an analyst with Merrill Lynch, lowered his rating of the company from long-term buy to long-term accumulate and lowered his 2001 earnings expectations from 65 cents a share to 20 cents a share after the November announcement (and to nil after the December announcement). In supporting his revision, Ching argued “it’s very dangerous to assume some of those revenue-recognition issues won’t impact revenue figures going forward. That’s why we’re being so cautious.”3 Paul Sagawa, at Sanford C. Bernstein, commented: “Over the last two or three years, lax financial controls have resulted in sales force pulling orders ahead into the last weeks of a quarter, often with the aid of customer discounts, in order to post quota-beating results”4 but remained optimistic: “. . . Debbie Hopkins, CFO is spearheading the implementation of strong financial controls and information systems.”5

1 Shawn Young, “Lucent Revises Its Revenues Downward—Total of $679 Million Is Cut For Fiscal 4 Quarter; 1 -Period Loss Is Seen,” Wall Street Journal, December 22, 2000. th st

2 Source of information on reasons for restatements: Ibid. 3 Michael Ching, Lengthening List of Questions: Lowering Long-Term Rating, Merrill Lynch, November 21, 2000.
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