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Nortel worker testifies profitability bonus booked before results known

The company sign at a Nortel Networks office tower in Toronto.

NATHAN DENETTE/NATHAN DENETTE/THE CANADIAN PRESS

Senior officials at Nortel Networks Corp. booked a special $73-million "return to profitability" bonus payment at the end of the first quarter of 2003 even though staff had not completed financial statements yet for the period.

Former director of finance Michael McMillan told the Toronto fraud trial of three former Nortel executives that his staff was gathering financial information from all of Nortel's divisions in early April, 2003, when a $73-million entry was booked to pay bonuses for achieving profitability in the first quarter ended March 31.

"We were still in the middle of the closing process," Mr. McMillan testified.

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Mr. McMillan told Crown attorney Amanda Rubaszek he did not know who authorized the April 5 entry, but it would have had to come from senior staff.

"Was profitability known at that time, on April 5?" Ms. Rubaszek asked.

"Not to my knowledge," Mr. McMillan replied.

Asked how a bonus for achieving profitability could be booked before the bottom line was known for the period, Mr. McMillan said he assumed it was based on internal forecasts, but he wasn't sure.

The Crown has alleged that former Nortel chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly manipulated Nortel's accounting reserves in 2002 and 2003 to reach profitability by the first quarter of 2003 and earn special "return to profitability" bonuses.

The bonus plan had been set up by the company's board at the end of 2002, and promised to pay all employees a bonus when Nortel achieved a single quarter of profitability after years of losses. Further bonuses were available for senior executives if Nortel's profitability continued for up to four consecutive quarters.

Nortel ultimately reported a profit of $54-million (U.S.) for the first quarter of 2003, triggering the first $73-million payment under the "return to profitability" bonus to all staff. The profit for the quarter was recorded after Nortel released $80-million of controversial head office or non-operating accounting reserves, which helped push the company from a loss to a profit in the period.

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Mr. McMillan also testified Monday about another item that was booked early in the first quarter close process.

It involved the unwinding of $35-million of "out of balance" accounting provisions. The reversal, booked April 5, had the effect of boosting profit by $35-million in the first-quarter financial statements.

Mr. McMillan testified that after the reversal was booked, he was asked to analyze the "out of balance" provision to see if it was still needed. He said his work on the report lasted until into July.

Mr. Justice Frank Marrocco, who is presiding over the trial, asked Mr. McMillan how $35-million of the provision could be released in early April when the analysis of it had not yet been done.

Mr. McMillan replied that there was a judgment call that some of the provision could be released even before the detailed analysis was completed on the total amount because the number was trending downward.

Ms. Rubaszek asked Mr. McMillan if he was comfortable with the level of analysis that had been done before the decision was made to reverse the reserve and boost profit in the first quarter.

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"I wasn't comfortable we had enough detail," he replied. "We couldn't find a lot of support [for the provision] From that perspective, I wasn't totally comfortable."

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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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