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Lucent: It Must Be The Season

Jan 4

Written by: Jack Ciesielski
1/4/2008 7:53 AM

To forgive and forget. Or something like that.

In May 2004, Lucent was hit with a $25 million penalty for improperly inflating revenue by more than $1 billion. Ten individuals were also charged with reckless and fraudulent actions; their conflicts of interests prompted them to present improper financial reporting. Their actions included post-dating of documents and side-letter arrangements with third parties. Pretty damning stuff.

Three and a half years later, the firm is nailed by the SEC once again, even though it's now part of Alcatel. This time:

"...from at least 2000 to 2003, Lucent spent over $10,000,000 for approximately 1,000 Chinese foreign officials, who were employees of Chinese state-owned or state-controlled telecommunications enterprises, to travel to the United States and elsewhere. The Commission alleges that the majority of the trips were ostensibly designed to allow the Chinese foreign officials to inspect Lucent's factories and to train the officials in using Lucent equipment. In fact, according to the complaint, during many of these trips, the officials spent little or no time in the United States visiting Lucent's facilities. Instead, they visited tourist destinations throughout the United States, such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City... "

Having once demonstrated a lack of respect for the books-and-records and internal control provisions of federal securities laws, you might expect that the SEC would wallop Lucent for a second offense. Not so. Even though this escapade involved "improperly recording the payments for approximately 315 trips for Chinese government officials that had a disproportionate amount of sightseeing, entertainment and leisure" - a pretty clear violation of the Foreign Corrupt Practices Act of 1977 - no individuals who arranged such trips were charged by the Commission. The penalty: a civil fine of $1.5 million, plus a fine under a non-prosecution agreement with the Department of Justice. The total bill for the second offense is only 10% of the first offense.

In other words, repeat offenders get treated better the next time they offend. A frequent offender discount, or maybe the SEC was just moved by the spirit of the season.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

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