Nortel trial sees staff emails
Auditors were fully informed on release of reserves, defence says
Nortel’s auditors received detailed justifications for the release of accounting reserves into the telecom’s income in early 2003 that transformed a loss into a profit and triggered a $70 million bonus payout, the fraud trial of former executives at the Toronto company heard Friday.
Defence lawyer David Porter submitted evidence in Superior Court that showed external auditors Deloitte and Touche were given information from finance staffers on specific accrual transactions and the business reasons for their release to earnings in the period.
He cited emails to the auditors from Nortel personnel that showed why portions of $24 million (U.S.) in accruals were posted to income based on factors such as an acceleration of a contract dispute settlement. The amounts were booked as part of $80 million in releases added to Nortel’s profit-loss statement in the first quarter of 2003 that led to a turnaround profit and employee retention bonus payment.
Porter called the emails evidence of Nortel’s “pattern of disclosure” during Deloitte’s review of the company’s accrual accounting.
Porter also tabled documents that showed how Nortel finance directors attempted to purge accruals from the balance sheet that lacked detailed justification.
Under defence cross-examination, former Nortel planning and analysis director Brian Harrison said he was scrutinizing a list in 2003 of $189 million in non-operating head office accruals that Nortel finance staffer Sue Shaw said appeared to lack support and may need to be unwound. The lack of support for Nortel’s accrual accounting is at the heart of the fraud trial of former chief executive Frank Dunn, former chief financial officer Douglas Beatty and ex-controller Michael Gollogly. Lead prosecutor Robert Hubbard in his opening arguments alleged that the accused used accounting reserves as a “cookie jar,” booking amounts to the profit loss statement fraudulently to fabricate losses and profits that conformed to internal targets. He said the accused directed fraudulent and widespread manipulation of accruals, accounting provisions against future expenses or revenue that are to be wound down or posted as revenue or expense after a so-called triggering event such as payment of a debt. Harrison, the first witness in the trial, previously testified that Gollogly as corporate controller was responsible for non-operating reserves and decided when they would be released. Nortel’s audit committee commenced a probe of the company’s accounting after it posted a surprise profit in early 2003 in the wake of eight consecutive quarters of steep losses. The review triggered a $1 billion restatement of balance sheet liabilities and the transfer of billions in revenue that investigators said had been booked improperly. Nortel’s board fired Dunn, Beatty and Gollogly in 2004 for “financial mismanagement” and the RCMP charged the men with fraud in 2008. They have denied all wrongdoing.