Accounting reserves weren't needed for Nortel bonuses: witness

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Nortel Networks Corp.'s top executives would have earned their special "return to profitability" bonuses – but later in 2003 than they were actually paid – after the company did two successive restatements of its books to correct the way accounting reserves were used at the company.

Peter Dans, former vice-president of planning at Nortel, testified Tuesday at the fraud trial of three former top executives that he was responsible for calculating eligibility for the bonuses as the company worked on a restatement in 2004 following the dismissal of the executive team.

His analysis, shown in court Tuesday, suggests milestones would have been reached under both the "return to profitability" bonus plan and a separate restricted share unit plan by the end of 2003 if the accounting reserves had been booked properly.

"All the milestones were met at some point in 2003," Mr. Dans said.

The Crown has alleged former chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly manipulated the company's accounting reserves in 2002 and the first half of 2003 to trigger bonus payouts for themselves.

Mr. Dans' analysis – only available in hindsight as the restatements were completed – suggests Nortel's top executives could have corrected their books and waited until later in 2003 and would have earned their bonuses anyway.

Lawyers for the men have denied the allegations, saying the reserves were not manipulated and the accused believed they were being used appropriately. The defence argues the accounting decisions were approved by auditors at Deloitte & Touche.

Defence lawyers have also argued the analysis suggesting the bonuses would have been payable in 2003 means the accused had no motive to manipulate earnings.

But Mr. Danssaid Tuesday his calculations in the first quarter of 2003 showed the bonus would not have been payable in that period without the use of accounting reserve to bolster income.

In other words, the results of later restatements were not known at the time and the company believed it was facing a loss in the first quarter of 2003. Indeed, successive restatements showed the bonuses would not have been payable in the first quarter of 2003.

Nortel used $80-million (U.S.) of non-operating head office accounting reserves it was holding on its books in the first quarter to add $80-million more to its bottom line and transform a loss into a profit for the period.

That use of reserves was later reversed in a restatement of the company's books.

Defence lawyers have previously introduced a Deloitte & Touche memo from the summer of 2003, which included a calculation suggesting the bonuses would have been payable in the first quarter of 2003 with or without using the $80-million of reserves.

Mr. Dans testified the Deloitte & Touche calculation was not done the way he was calculating internally at the time, and it did not appear in early 2003 that the bonuses would have been payable without the additional reserves.