Sign outside Nortel's former Ottawa research campus.Reuters
Nortel Networks Corp.'s external auditors warned the company it should not rush incomplete work on a restatement of its books in 2003, but a senior staff member testified Monday she felt hurried to announce the restatement.
Karen Sledge, Nortel's former assistant controller, took the witness stand at the fraud trial of three former Nortel executives and said she felt the company did not have a full handle on its balance sheet problems when it announced on Oct. 23, 2003, that it would do a restatement that would involve unwinding $900-million (U.S.) of liabilities carried on its books.
"We felt that we had rushed into the press release, but I felt that it was fairly accurate," Ms. Sledge testified.
"We weren't done scrubbing the data and looking at all the documentation."
The Oct. 23 press release revealed that Nortel would restate its financial results for the first two quarters of that year, and for 2000, 2001 and 2002.
While Nortel would unveil the details of its promised restatement by the end of December – restating $952-million of liabilities carried on its books – the company announced just two months later that it had discovered the restatement was inadequate and there would have to be a further restatement.
Ms. Sledge is the third witness to testify at the Ontario Superior Court fraud trial of former Nortel chief executive officer Frank Dunn, former chief financial officer Douglas Beatty, and former controller Michael Gollogly, who are accused of manipulating Nortel's financial statements in the first and second quarters of 2003 to trigger special "return to profitability" bonuses for themselves.
Crown attorney Robert Hubbard has previously said the trial will also hear evidence that the men knew the first restatement in December, 2003, was still false, and the restatement was itself part of their fraud.
In court Monday, Mr. Hubbard unveiled an e-mail written Oct. 20, 2003, by Don Hathway, the lead audit partner for the Nortel account at Deloitte & Touche, who was reporting on a meeting of Nortel's audit committee earlier that day.
In the e-mail, Mr. Hathway said Deloitte had told the audit committee the company was "significantly" behind schedule on giving the auditor details of its third-quarter financial results, and the auditor would therefore not be able to do an adequate review of the results unless their release was delayed. The auditor said it would not be able to offer its usual assurances on their accuracy.
The auditor said if the company was going to go ahead with the planned Oct. 23 press release, it would have to make clear the numbers were preliminary and subject to change because the balance sheet review was not done yet.
The e-mail also reported that another Deloitte employee attending the audit committee meeting had recommended the company's press release and its third-quarter financial results should not be filed until management and the auditors were satisfied they were right.
Mr. Hathway's e-mail included a proposed edit mentioning that Mr. Beatty had called Nortel's work on its restatement "a high wire act with no safety net."
The press release announcing the restatement and the third-quarter financial results was issued three days after the audit committee met.
Ms. Sledge also testified Monday that she was unaware those third-quarter financial statements included disputed reversals of accounting reserves that bolstered income in that quarter.
Mr. Hubbard asked her if that accounting treatment was appropriate based on the rules laid out internally during the restatement review process.
"It would not be in accordance with the process we were doing at that time," she replied.
Ms. Sledge, testifying before Mr. Justice Frank Marrocco, is expected to be in the witness box most of this week and next.
Janet McFarland