On May 17, the Securities and Exchange Commission issued litigation release No. 18715, charging Lucent Technologies and several of its officers and others with securities fraud. The SEC claimed that they squashed generally accepted accounting principles (GAAP) by improperly recognizing some revenue and by prematurely recognizing other revenue. Unlike tales by Lewis, these yarns by corporate America are becoming so repetitive and so overplayed that they are downright boring.

In some cases Lucent officers entered into oral, side agreements with other entities that altered the distribution agreements between Lucent and the other corporation. Sometimes these side agreements would provide a right of cancellation, which implies that the conditions for revenue recognition had not been met. Sometimes these side agreements promised various activities to assist the other company, which in turn would diminish the impact on Lucent's income.  Additionally, some were post-dated in an attempt to move marketing and administrative costs to a future period. In another set of transactions, Lucent had another firm promise to send it a purchase order, with the understanding that Lucent would later grant various credits to the customer so that the real price was a lower one.

These shenanigans allowed Lucent to overstate its revenues by $1.1 billion dollars and overstate its pretax earnings by $470 million in fiscal 2000. These actions, of course, misled investors and creditors, who used to believe that accounting numbers offered some help in representing the effects of transactions and events on a business enterprise.

Several individuals settled with the SEC. While stating that they did nothing wrong, these individuals promised never to do them again. The SEC levied fines against them, ranging from $60,000 to $110,000. These fines seem inadequate to me. If you really want to attack the problem of accounting scandals, one must hit corporate America where it hurts. Instead of fining them trivial amounts—trivial with respect to their wealth—why not charge them in criminal court and attempt to send some or all of them to prison. A few more prison sentences might provide the sobriety we need in corporate America that will induce more executives to quit lying in their financial reports.

What makes this drama a bit more interesting than other cases is that Lucent interfered with the SEC's investigation. Specifically, Lucent did not turn over requested documents, it entered certain agreements with the SEC but publicly attempted to undermine them by explaining Lucent's actions as merely a "failure of communication," it inappropriately expanded the list of employees that could be indemnified, and it failed to provide certain disclosures to its employees on the indemnification issue. In short, Lucent obstructed the SEC in its investigation and in its attempts to resolve the complaints.

The SEC fined Lucent $25 million for its "lack of cooperation." I like this amercement, which exceeds previous fines against corporations for interfering with the work of the SEC. It sends a strong signal to corporate America that the SEC doesn't appreciate the dissembling and the outright lying that it sometimes receives during these investigations. It isn't enough to promise cooperation; instead, firms need to cooperate fully and truthfully if they really want to put such a sad event behind them.

However, it is interesting that the SEC did not fine Lucent for the accounting fraud. The fine is only for Lucent's lack of cooperation. Does this imply that the SEC thinks it worse for business enterprises to lie to the SEC than it is to deceive investors and creditors? It certainly appears that way.

In The Chronicles of Narnia, Lucy's brothers and sister criticized her for telling the truth just because they did not experience it. At Lucent, however, we have individuals who fabricated stories about their financial doings. Investors and creditors experienced the fallout from these prevarications and are waiting a proper vindication from the SEC and other government officials. The SEC litigation release provides a step in the right direction, but only a step.

Poor old Lu(cent)!

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.