Senior officials at Nortel Networks Corp. scrambled late one evening in January, 2003, to change an accounting provision and bolster income for the fourth quarter of 2002 because they wanted to avoid having to rewrite a media release that had already been prepared, a Toronto court heard Tuesday.
Linda Mezon, Nortel’s former assistant controller, testified Tuesday at the Toronto fraud trial of three former top executives, describing a controversial day at the company that has become a key area of focus at the long-running trial.
Ms. Mezon, the most senior former Nortel employee to testify in the case so far, said staff decided the evening of Jan. 21, 2003, to make a change in accounting related to complex financing deal with JDS Uniphase. There was pressure to make the decision after weeks of reviewing the matter because Nortel was scheduled to announce its 2002 financial results two days later.
The decision, however, meant Nortel had to make an accounting change that would reduce its anticipated income by $25.5-million (U.S.) in the fourth quarter, Ms. Mezon testified.
Ms. Mezon testified she returned to her office after the late-day decision and was in a hurry to go home because her husband was quite ill.
“I figured we were finished and done,” Ms. Mezon testified.
Instead, she said an accounting employee came into her office and mentioned she had been told there was a need to find an “offset” that could be booked in the financial statements to bolster and offset the drop in income caused by the JDS decision.
Shortly afterward, she said then-controller Michael Gollogly came to her office and mentioned the same thing.
“The purpose for the offset was so we didn’t have to change all the documents that had been built related to the announcement of the earnings,” Ms. Mezon testified.
Ms. Mezon, who is now chief accountant at Royal Bank of Canada, is testifying at the fraud trial of former Nortel chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly.
The men are accused of manipulating Nortel’s accounting reserves in 2002 and 2003 to push the company into profitability and trigger special “return to profitability” bonuses for executives.
At the beginning of the trial, the Crown said the decision to offset the JDS drop in income with a $25.5-million change in the inventory provision was an “inappropriate and arbitrary” accounting decision done simply to ensure income in the quarter would not change.
Lawyers for the men have denied the allegations and have said the accounting decisions were appropriate and were supported by the company’s auditors at the time.
Ms. Mezon testified Tuesday she didn’t feel it was her responsibility to find an offset when approached on Jan. 21, and left the office for the evening.
The next morning, she said she learned an accounting entry had been booked to reduce a provision for excess inventory by the exactly same amount – $25,519,848 – boosting income as a result and offsetting the reduction caused by the JDS transaction.
“The issue became could we – without making a mistake – have the ability to try to change all the numbers or should we stick with the numbers,” she said. “Because there was a feeling there was no way possible we could miss the press release date.”
Asked Tuesday what she did when she learned about the offset, Ms. Mezon said she contacted Ken Crosson, an employee responsible for the company’s excess inventory reserves, to ask whether he was okay with the decision to reduce his $1-billion inventory provision by $25.5-million.
“I was thinking ultimately about whether or not the [financial]statements as a whole were okay,” she said.
She added the company did not feel the inventory change was a material transaction because the inventory provision was so large at the time and the $25-million change was not a large amount of the total.
“This was very unusual,” Ms. Mezon added. “No one ever recalls having to deal with something this late in the process before.”
Ms. Mezon resigned from Nortel in June, 2003. She later served as a member of the Accounting Standards Board, which sets Canada’s accounting rules.