Senior executives at Nortel Networks Corp. told employees to make new accounting reserves to arbitrarily bring the company’s 2002 financial statements in line with earlier forecasts, a Toronto court heard Friday.
In closing arguments at the long-running fraud trial of three former Nortel executives, Crown attorney David Friesen dismissed a suggestion by defence lawyers that the changes to the company’s books at the end of 2002 were an attempt to fix errors and make the financial statements more accurate.
Instead, Mr. Friesen said testimony presented earlier this year at the fraud trial showed former employees unexpectedly got phone calls in early January, 2003, asking them to find new accounting reserves that they could book to change the financial results for the fourth quarter of 2002. “The truth is none of these accruals would have been booked without the call out, and all of the witnesses involved in this process confirmed that,” Mr. Friesen told Mr. Justice Frank Marrocco of the Ontario Superior Court.
The Crown has alleged Nortel unexpectedly earned a profit in the final quarter of 2002, but the firm’s executives fraudulently created new accounting reserves, after all Nortel’s units had submitted their final numbers, in order to reverse the profit and turn it into a loss. The Crown says they did it because they had already publicly forecast a loss, and their executive bonus plan would not give them credit for a profit in that period.
The Crown alleges they used the new reserves and others to trigger profits in the first half of 2003 to ensure their bonus payments at that time. “The calls were not an attempt to ensure the accuracy of the financial results,” Mr. Friesen said. “They were an attempt to move a profit to a loss.”
The Crown completed its second day of closing arguments at the trial. Defence lawyers are scheduled to make their closing remarks on Tuesday and Wednesday.
Former Nortel CEO Frank Dunn, former CFO Douglas Beatty and former controller Michael Gollogly are each charged with two counts of fraud for allegedly using accounting reserves to manipulate Nortel’s profits in 2002 and 2003 to trigger special “return to profitability” bonus payments for themselves. The men have denied all the allegations, and have said any improper use of accounting reserves was an honest error and not deliberate manipulation.
Earlier Friday, Crown attorney Amanda Rubaszek told Judge Marrocco accounting staff prepared an analysis in 2002 showing $303-million of excess accounting reserves were being carried on the company’s balance sheet, but the information was not shown to the company’s auditors and was not given to the board of directors.
She highlighted an analysis prepared internally by accounting employee Sue Shaw in 2002 that outlined the large volume of out-of-date accounting reserves being carried on the company’s books that were no longer needed and available for release.
She said various versions of Ms. Shaw’s report were distributed within Nortel, but most did not contain the page with the key analysis showing the total $303-million of excess reserves that were improperly remaining on the books even though they were no longer needed or had or no supporting materials to justify their existence.
The full report with the $303-million figure, Ms. Rubaszek said, appears to have been distributed to senior executives only, and does not appear to have gone to auditors at Deloitte & Touche. Nonetheless, she said accounting staff testified earlier this year that they knew the balance sheet had become bloated with out-of-date entries that had not been subject to proper scrutiny.
“There was general knowledge throughout the company that they had lost control of the balance sheet,” Ms. Rubaszek said.
In such an environment, she said Nortel’s top executives should not have certified that the company’s financial statements were accurate, and Ms. Shaw’s report should have led to “swift action” to correct and restate the balance sheet.
Ms. Rubaszek led Judge Marrocco through the circuitous history of Nortel’s accounting reserves as the company adjusted them in 2002 and 2003.