The board of Nortel Networks Corp. paid bonuses to executives for returning the company to profitability in 2003 based on internal calculations of profitability that relied on using large accounting reserves to meet the targets, Crown attorney Robert Hubbard said Monday.
Mr. Hubbard re-examined witness Brian Harrison, Nortel’s former vice-president of planning, about a claim last week by defence lawyers that three former executives of Nortel had no motive to use accounting reserves to trigger their bonus payouts in 2003 because the bonuses would have been payable anyway, even without the use of the reserves.
The Crown, however, showed Mr. Harrison a document from Nortel’s board of directors in April, 2003, approving the payout of bonuses in the first quarter of 2003. It showed the board used an internal “pro forma” calculation of a $40-million (U.S.) profit in the quarter as its basis for approving a bonus payout.
In that quarter, Nortel had recorded $80-million of gains from the use of controversial non-operating accounting reserves to achieve profitability.
Under questioning, Mr. Harrison agreed the $80-million of reserves pushed the company into a pro forma profit of $40-million for the first quarter, which was used to approve the bonus payout.
Mr. Harrison is the first witness at the trial of former Nortel chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly. The Crown alleges the men committed fraud by arbitrarily using Nortel’s accounting reserves to push the company into profitability to trigger their bonus payouts in 2003.
The questioning Monday addressed a key document introduced by defence lawyers last week showing Nortel’s external auditors at Deloitte & Touche did a new calculation in September, 2003, that concluded Nortel was profitable enough in the first two quarters of that year to trigger the payout of bonuses even without including millions of dollars of accounting reserves booked at the time.
The auditors used an old calculation of “pro forma” profit that was in place in 2002, but discontinued in 2003, arguing the 2002 numbers should have been the basis for the bonus payout.
However, the board document introduced Monday said that because the company had changed the way it calculated internal “pro forma” profit between 2002 and 2003, the board declared it would have the final say about whether the profitability trigger had been met for the purposes of the bonus program.
The defence said last week the auditor’s calculation shows there was no motive to manipulate Nortel’s books in the first quarter of 2003. But Mr. Hubbard’s questioning on Monday suggested the Deloitte & Touche calculation prepared later in the year was different from the numbers used internally within Nortel and by the board of directors at the time the bonus plan was being approved.
Mr. Hubbard also asked Mr. Harrison about his earlier in which he said he believed all accounting reserves being used at the company had proper triggers and were documented properly.
The Crown noted Nortel announced a huge restatement at the end of 2003 that included $1-billion of improperly booked reserves. In the restatement, Nortel acknowledged the reserves had previously been booked without adequate support or documentation.
“The document admits that while you were there, accruals approaching $1-billion had to be reversed because there was no support, no foundation,” Mr. Hubbard said.
“My belief at the time I was there was that the accounting was correct,” Mr. Harrison replied.
Mr. Harrison left Nortel for a new job in late June, 2003, as the company was concluding its second quarter.
Mr. Harrison also testified Monday that he never heard Mr. Beatty use the term “cookie jar” to describe the company’s accounting reserves, and said Mr. Beatty never asked him to do anything dishonest.
“He was a man of integrity?” asked lawyer Greg Lafontaine, who is representing Mr. Beatty.
“Yes,” Mr. Harrison replied.
His testimony is expected to conclude Monday afternoon.
