Monday, January 10, 2005

Nortel Networks Completes its Financial Inquiry

Following an extensive independent review, Nortel Networks filed its audited financial statements for the year 2003. The filings include substantial revenue adjustments due to accounting errors related to revenue recognition.

The independent review examined the facts and circumstances leading to the earlier restatement of the company's financial results for 2002, 2001 and 2000 and the first two fiscal quarters of 2003 (which independent review was later extended to cover the balance of 2003).

Among the outcomes of the refiling are the following:

  • The main conclusion of the investigation was that former corporate management (now terminated for cause) and former finance management (now terminated for cause) in the company's finance organization endorsed, and employees carried out, accounting practices relating to the recording and release of provisions that were not in compliance with U.S. generally accepted accounting principles ("U.S. GAAP") in at least four quarters, including the third and fourth quarters of 2002 and the first and second quarters of 2003. In three of those four quarters - when Nortel was at, or close to, break even - these practices were undertaken to meet internally imposed pro-forma earnings before taxes ("EBT") targets

  • The actions caused Nortel to report a loss in the fourth quarter of 2002 and to pay no employee bonuses, and to achieve and maintain profitability in the first and second quarters of 2003, which, in turn, caused it to pay bonuses to all Nortel employees and significant bonuses to senior management

  • Nortel Networks' Management "tone at the top" conveyed the strong leadership message that earnings targets could be met through application of accounting practices that finance managers knew or ought to have known were not in compliance with U.S. GAAP and that questioning these practices was not acceptable

  • There was a lack of technical accounting expertise which fostered accounting practices not in compliance with U.S. GAAP

  • There were weak or ineffective internal controls which, in turn, provided little or no check on inaccurate financial reporting

  • The company operated under a complicated "matrix" structure which contributed to a lack of clear responsibility and accountability by business units and by regions

  • There was a lack of integration between the business units.

  • Nortel posted significant losses in 2001 and 2002 and downsized its work force by nearly two-thirds. The remaining employees were asked to undertake significant additional responsibilities with no increase in pay and no bonuses.

  • In April 2004, company CEO Frank Dunn was dismissed "for cause." Nortel Networks also fired its former chief financial officer, Douglas Beatty, and former controller, Michael Gollogly, both of whom had been placed on paid leave of absence by Nortel Networks on 15-March-2004. At the time, Nortel Networks named William Owens as its new president and CEO.

  • Nortel's profits for 2003 totaled $434 million. Previously the company had reported 2003 profits of $732 million .

  • As a result of the inquiry, twelve senior executives of Nortel's core executive leadership team have voluntarily undertaken to pay to the Company over a three year period the amount of their Return to Profitability bonuses awarded in 2003 (net of tax withheld at source) aggregating the equivalent of approximately US$8.6 million.

  • Susan E. Shepard has been appointed to the recently created position of Chief Ethics and Compliance Officer reporting to the chairman of the Board and the president and CEO.

  • Two new members have been added to the company's Board of Directors.

  • Nortel Networks is adopting in full the recommendations by the independent Audit Committee for remedial measures that are intended to prevent the recurrence of the inappropriate accounting conduct.


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