The reversal of an especially controversial accounting reserve that helped trigger payouts under an executive share plan at Nortel Networks Corp. in 2003 was carefully examined by external auditors at Deloitte & Touche and deemed "reasonable," a Toronto court heard Thursday.
The fraud trial of three former Nortel executives – Frank Dunn, Douglas Beatty and Michael Gollogly – heard testimony Thursday from former Nortel accountant Susan Shaw about one of the most controversial accounting provisions on the company's books, relating to a 2001 lawsuit filed against Nortel by Siemens AG.
Nortel had created an accounting reserve on its books at the time the Siemens lawsuit was filed to provide for a settlement in the case, but the Crown has alleged a portion of the provision was arbitrarily left on Nortel's books long after the lawsuit was resolved in the fourth quarter of 2001.
It became part of a group of extra head office, non-operating reserves that the Crown alleges was reversed arbitrarily – and with no appropriate business trigger – to push the company into a profit in 2003 and earn "return to profitability" bonuses for executives.
The $4-million (U.S.) remaining Siemens provision has been a particular focus at the fraud trial because the small amount was initially booked to be reversed into income in the first quarter of 2003, but then withdrawn, allegedly because it was not needed to push the company into a profitable position in the quarter. It was then booked to be used in the second quarter, and became the only head office non-operating reserve used in the quarter.
The Crown contends the Siemens reserve was used in that quarter because Nortel needed almost exactly $4-million more income to reach the payout trigger for the company's restricted share unit plan at that time.
However, lawyer David Porter, who is representing former Nortel chief executive officer Frank Dunn, has argued the Siemens amount was triggered in the second quarter because that is when the company believed it was no longer needed and should appropriately be reversed.
In cross-examination Thursday, he showed Ms. Shaw a working document recovered from the files of Nortel's external auditors at Deloitte & Touche, showing the auditor reviewed Nortel's justifications for keeping the Siemens reserve on the books until that time and for reversing it in the second quarter of 2003.
Deloitte's notes showed the auditor reviewed Nortel's detailed rationale for the reserve and concluded its release in the second quarter was "reasonable."
The company said it was holding on to the reserve because the settlement with Siemens had been "rancorous" and Nortel wanted to be sure there would be no further claims made after the lawsuit was settled and $32-million was paid to Siemens in two instalments in late 2001 and late 2002.
In its working notes, Deloitte recorded that Nortel felt it was "prudent" to keep the $4-million on the books until mid-2002. Ms. Shaw testified she felt the reserve was being reversed on schedule with the plan to keep it in place for the first two quarters of the year.
Mr. Porter asked Ms. Shaw whether the auditors were satisfied at the time there was an appropriate triggering event to use the reserve in the second quarter of 2002, and she replied there were.
However, the amount became part of a broad restatement of reserves announced at Nortel at the end of 2003. The company noted in the restatement that the Siemens reserve should have been reversed in the fourth quarter of 2001 when the lawsuit was settled.
Ms. Shaw is the second witness at the trial of Mr. Dunn, former Nortel chief financial officer Mr. Beatty and former controller Mr. Gollogly, who are accused of fraud for manipulating Nortel's reserves to trigger their own bonus payouts.
Ms. Shaw also testified Thursday that Mr. Beatty and Mr. Gollogly were both new to their jobs when she was asked in mid-2002 to launch a review of the company's balance sheet reserves.
She said it was a priority for both men to assess the status of the reserves and her work was done at their initiative.
Ms. Shaw also said she was never told to do anything wrong by Mr. Beatty, and said she always felt he was making his best effort to do everything he could for the company.
Janet McFarland