He said employees will also testify about the unprecedented push at the end of the fourth quarter of 2002 to find new accruals to turn an unexpected profit into a loss for the period. He said internal memos showed executives wanted to adhere to Mr. Dunn’s goal of achieving profitability by the second quarter of 2003, although ultimately Nortel reported a profit starting in the first quarter.
Nortel employees from operating divisions will testify that they were happy with the state of their reported results at the end of 2002, and only found extra provisions to book because they were told to do so by head office in a rush in early 2003, Mr. Hubbard said.
He said the trial will hear that Mr. Beatty expressed concerns that Nortel would not get credit in the markets for reporting a “blip” of one quarter of profits after years of large losses.
Mr. Hubbard also explained that an internal report from September, 2002, estimated that the company would earn $2.4-billion to $2.5-billion in revenue in the first quarter of 2003 and report a loss of about $95-million. In early 2003, the board was told revenue would be about $2.35-billion for the quarter and the company could have a loss of $240-million in the period.
But by April, the board was told the company expected to report revenue of $2.39-million for the first quarter and earn a profit in the period. The change was achieved by using the company’s “cookie jar” of accounting reserves, Mr. Hubbard suggested.
Judge Marrocco asked Mr. Hubbard why the board of directors didn’t question such a substantial reversal of fortune.
“No one puts together the fact they’re told we need $2.3-billion to experience a loss of $240-million, and we have $2.3-billion [of revenue] and we actually have a profit of $54-million,” he asked. “Why didn’t someone ask the question, ‘What happened?’ ”
Mr. Hubbard said the judge was right in his understanding of the issue, but did not offer a further response. He later noted that the board was being told that the accounting provisions reflected in the financial statements were the result of normal changes in estimates, rather than improper releases of the amounts.
Judge Marrocco also asked if Nortel’s auditors at Deloitte & Touche knew of the misuse of accruals. Mr. Hubbard said some of the amounts were contentious at the time, but were ultimately permitted by the auditors.
He said the approvals do not lessen the legal responsibility of the accused executives to state their financial results properly, however.
“Whether or not other parties were acquiescing or were negligent, Your Honour may have to draw conclusions, but it doesn’t exculpate the accused.”
