Nortel Networks Corp. appeared profitable enough in the first quarter of 2003 to trigger a "return to profitability" bonus for top executives even without using controversial accounting reserves that bolstered earnings in that period, a lawyer for former chief executive Frank Dunn suggested Thursday.
Lawyer David Porter introduced a document as evidence at Mr. Dunn's fraud trial in Toronto showing an analysis completed by auditors at Deloitte & Touche in September, 2003, as they began reviewing Nortel's use of accounting reserves earlier that year.
The analysis suggests Nortel would have been profitable even without using accounting reserves in the first quarter, based on a calculation using an internal pro forma measure of profitability that was used at the company in 2002 when the return to profitability bonus was created. The method for calculating internal pro forma income had been changed in 2003.
The audit firm's analysis showed the company earned a profit of $109-million in the first quarter under the pro forma methodology, and concludes the bonus target was met without using the accruals.
Mr. Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of fraud for misstating Nortel's financial results in 2002 and 2003 to trigger their return to profitability bonuses. The Crown has alleged the men arbitrarily used corporate reserves to push Nortel to a profitable position in the first and second quarters of 2003 to trigger their bonuses.
The defence has previously argued Mr. Dunn had no motive to manipulate accounting reserves to trigger their bonuses, because the bonuses would have been payable anyway.
In court Thursday, Mr. Porter showed the Deloitte & Touche calculations to Brian Harrison, Nortel's former vice-president of planning and analysis, who previously testified it was part of his job to track the numbers the company needed to achieve to trigger the bonus.
The Crown previously introduced documents prepared by Mr. Harrison using different numbers that suggested the bonus was only payable in the first and second quarters of 2003 by including large accounting reserves to bolster profits.
Mr. Harrison testified he assumed the Deloitte & Touche calculation was correct but he was not familiar with all of the details it included.
Also Thursday, Mr. Porter suggested new accounting reserves booked for the fourth quarter of 2002 may have been in the works even before Mr. Harrison called around to drum up new provisions to reduce a profit to a loss for the period.
Mr. Porter suggested it was possible that accounting staff around the world were already preparing legitimate new reserves to be booked when they received a phone call from Mr. Harrison asking them about finding new provisions.
In cross-examination of Mr. Harrison, Mr. Porter asked whether he knew whether the reserves reported to him were new ones being created on the spot, or were ones already in the works.
"The speed which I got the response told me these were in progress," Mr. Harrison said.
Mr. Porter then suggested it was possible the entries may have been made anyway, even if Mr. Harrison hadn't called various divisions requesting them.
"I don't know if these entries would have been made or not," Mr. Harrison replied.
The questions focused on a controversial period in early January, 2003, when Nortel finance staff discovered the company had unexpectedly earned an internal pro forma profit of $73-million (U.S.) in the fourth quarter of 2002, six months ahead of its public forecasts.
Mr. Harrison testified earlier in the trial that he was asked to phone various business units to find new accounting accruals that could be booked as provisions, reducing the profit to a loss for that period and keeping earnings in line with forecasts.
He testified he had never previously been asked to do something like that, but within a day had verbal promises of $176-million of new reserves that could be booked by units around the world.
The Crown has alleged the accused did not want to book a profit in the fourth quarter of 2002 because they felt it would be a "blip" and they could not report another profit in the first quarter of 2003. Their bonus was scheduled to rise only if they could sustain two successive quarters of profitability.
However, in cross-examination Thursday, Mr. Porter suggested to Mr. Harrison it was common for final numbers to roll for days after a fiscal quarter ended, and said it was most important to ensure the numbers were correct even if they came in late.
He also asked Mr. Harrison whether he believed the new accounting provisions reported to him after he phoned the divisions around the world would be backed up by proper supporting documentation.
"Yes, that's correct," Mr. Harrison replied.
"You certainly did not suggest to them that any particular accrual should be made, or any particular number targeted?"
Mr. Harrison replied he did not.
Nortel ended up recording an internal pro forma loss of $62-million in the fourth quarter of 2002, but reported profits in the first and second quarters of 2003, triggering large bonuses for executives. The Crown alleges the profits were the result of manipulations by unwinding former, existing accounting reserves and taking the money into income.
Also Thursday, Mr. Porter entered Mr. Dunn's electronic schedule into evidence, showing the CEO was out of the office from Dec. 20, 2002, until he returned from a business trip to Asia on Jan. 11.
Mr. Harrison testified Mr. Dunn was away in early January during the closing period for the 2002 financial statements, and said he had no contact with him during that period.
Janet McFarland