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Ex-Nortel accountant uncomfortable with entry process

Nortel's former controller Michael Gollogly leaves court in Toronto Jan. 20, 2012. A former accountant testified Tuesday that Mr. Gollogly discussed a letter about the tech firm's accounting practices with her after she left in 2003.

Moe Doiron/The Globe and Mail/Moe Doiron/The Globe and Mail

A senior Nortel Networks Corp. accounting employee quit the company after completing the books for the controversial fourth quarter of 2002, saying she was uncomfortable with the process and unhappy with the long hours.

But chartered accountant Helen Verity, former director of consolidations at Nortel, said she did not feel it was her role to question senior executives about the appropriateness of last-minute accounting changes happening at the company.

Ms. Verity told the Toronto fraud trial of three former Nortel executives her team was responsible for tracking and inputting late accounting entries that included creating new accounting reserves at the company, which are now the subject of the fraud allegations.

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But she said none of the changes were made on her initiative, and she was simply doing as asked by her managers.

"I wasn't part of the process around the journal entries themselves," she said. "This [tracking]was my role. This is what I was asked to do."

She said the reserves were being ordered by senior managers and reviewed by the company's auditors, so "I didn't feel I needed to question them."

Ms. Verity testified she gave her notice in January, 2003, and departed from Nortel in early February.

"I didn't like the closing process," she explained. "I didn't want to work until 2 a.m. every morning."

Asked if the hours were her only concern, she responded: "The process was large and unwieldy and it wasn't where I preferred to be."

The Crown has accused former chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly of manipulating accounting reserves at Nortel to trigger special "return to profitability" bonuses for executives.

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The men have denied the allegations, and their lawyers have said the changes to reserves were reasonable at the time and were all approved by the company's auditors at Deloitte & Touche.

Also Tuesday, Ms. Verity testified she kept in touch with Mr. Gollogly after she quit Nortel, and in July, 2003, he showed her a draft of a letter he was thinking of sending the company's board of directors, complaining about accounting practices at Nortel.

Ms. Verity said she didn't discuss Mr. Gollogly's concerns with him in detail, but read the letter and offered a small amount of feedback.

"I think I said it was well written, and it was quite serious," she recalled.

She said she agreed with his comment in the letter that his position as controller of Nortel might be untenable once the board had read the letter.

The Crown has said it appears the letter was never sent.

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The Crown has alleged Nortel unexpectedly turned a profit in the fourth quarter of 2002, but the senior executives decided to create new accounting reserves to transform it into a loss for that period.

They are accused of then using some of those reserves – and others already on the books – to push the company to profitability in the first two quarters of 2003, when they could earn the maximum possible payments under the bonus plan.

Ms. Verity testified she was annoyed that there were changes to accounting entries into late January, which she said was "very late" in the closing process. The final changes were made just two days before the company issued a press release announcing its 2002 results.

The last two changes saw Nortel suddenly reverse $25.5-million from a reserve for obsolete inventory that had just been created two weeks earlier. The Crown alleges the amount was reversed arbitrarily because the company discovered it had to book an unrelated $25.5-million cost for a business deal involving JDS Uniphase Corp. and the executives wanted the bottom line to come out to the same amount.

In court Tuesday, Ms. Verity was shown journal entries she completed recording a $25,519,848 cost for the JDS deal, and a second entry recording a $25,519,848 reduction in the inventory reserve.

Crown attorney David Friesen noted the amounts matched exactly, and asked Ms. Verity whether there was any connection between the inventory reserve and the JDS deal. She said she was not aware of any.

"Did it strike you as odd the amounts were exactly the same down to the dollar," Mr. Friesen asked.

"I don't know," she replied. "I don't have all the information."

He also showed her documentation prepared internally by Nortel staff to justify the new inventory reserve to the company's auditors. He asked her if the backup documents mentioned anything about JDS. She said they did not.

Ms. Verity's testimony wrapped up Tuesday. The trial is taking a break until March 26.

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