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Ex-Nortel vice-president asked to clean up balance sheets, court hears

Delaying Nortel results ‘potentially harmful’ to investors, court told

BLAIR GABLE/REUTERS

A former Nortel Networks Corp. finance employee said he was surprised by the high volume of excess accounting reserves he found on the books in the wireless division in 2002.

But even as James Kinney worked to clean up the balance sheet in the fourth quarter of 2002, he testified Monday he also was asked to find new provisions he could create that quarter to help adjust Nortel's financial results in the period.

Mr. Kinney, former vice-president of finance in Nortel's wireless division, testified Monday at the fraud trial of Nortel's three former top executives, describing his role in preparing the company's controversial fourth quarter financial results.

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The Crown alleges former chief executive office Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly manipulated the company's earnings in the fourth quarter of 2002 and the first two quarters of 2003 to trigger special "return to profitability" bonuses for executives.

The Crown has suggested the men directed staff to create new reserves to lower profit in the fourth quarter of 2002 to reduce an unexpected profit to a loss for the period because they did not believe a profit at that early date would enable them to collect the full bonus amount. Instead they allegedly used the reserves to create a profit in the first two quarters of 2003, triggering their bonuses at that time.

Lawyers for the accused have denied all the allegations and have said all the reserves were legitimate and were approved by Nortel's external auditors.

Mr. Kinney testified Monday he became vice-president of finance in the wireless division in August, 2002, and immediately learned there was $180-million (U.S.) of out of date provisions being carried on the books that needed to be cleaned up or released.

He took over the vice-president job from Mr. Gollogly, who had been promoted to controller earlier that summer.

Mr. Kinney said he was "surprised" by the large amount of excess reserves, but said he was not surprised some existed because he said he had seem similar situations "several times before" in his career at Nortel.

He said he spoke to Mr. Gollogly in October, 2002, and "the message was loud and clear that it was now my responsibility to clean them up."

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Mr. Gollogly also sent him an e-mail to remind him to be careful in his wording on the supporting documentation so it would appear the reserves had been legitimate in the third quarter and were only just found to have a triggering event to unwind them in the fourth quarter.

Although he did so, Mr. Kinney agreed with Crown attorney David Friesen that some of the provisions could not be justified in the third quarter because they were much older and out of date.

Mr. Kinney testified his division had completed a list of provision reversals for the fourth quarter when the final operating numbers came in showing the division was going to miss its $70-million profit target by $8.9-million.

Within hours, he said, staff found $8.9-million of extra accruals to release to boost income to the exact $70-million target level.

But after those numbers were booked and the wireless division submitted its numbers to head office, Mr. Kinney said he was asked to participate in a conference call with other divisional vice-presidents, hosted by Mr. Gollogly and one of his staff members, Brian Harrison. They reported Nortel had earned a bigger profit than expected in the fourth quarter.

"What was essentially said to us was we've come in too high. You guys need to go back and check to make sure you're got everything," Mr. Kinney testified.

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He said he understood he was being asked to check if there were any new accounting reserves he could create to lower profits.

The court was shown an e-mail he wrote to two of his division's employees directing them to consider new reserves and "be creative."

Mr. Kinney said he only meant he wanted them to look at the wireless division as a whole and go beyond their narrow business line responsibilities.

The division found $12.7-million of new reserves to book.

The company also reversed the earlier $8.9-million of old reserves that had previously been unwound, and the wireless division contributed over $20-million of new reserves.

They had the effect of lowering Nortel's profit in the fourth quarter by the same amount.

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Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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