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Delaying Nortel results 'potentially harmful' to investors, court told

Former Nortel executives Frank Dunn, Douglas Beatty and Michael Gollogly have pleaded not guilty to all charges before Mr. Justice Frank Marrocco of the Ontario Superior Court.

Nathan Denette/The Canadian Press/Nathan Denette/The Canadian Press

Delaying the release of Nortel Networks Corp.'s third-quarter financial results in 2003 while the company was working on a restatement of its balance sheet would have been harmful to Nortel and its investors, a lawyer for former chief executive Frank Dunn said Thursday.

Lawyer David Porter, who is representing Mr. Dunn at his fraud trial in Toronto, questioned Karen Sledge, Nortel's former assistant controller, at length Thursday about the work the company was doing in 2003 on the first restatement of its books.

In earlier questioning by Crown attorney Robert Hubbard, Ms. Sledge said she felt employees were rushed to meet an October deadline to publicly disclose the company's third-quarter financial results and the broad scope of the restatement. The restatement details were finalized in December, 2003, but Nortel announced two months later that it needed to do a second, broader restatement, which was ultimately unveiled in January, 2005.

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Mr. Porter suggested the company was obliged to act quickly on the restatement in 2003 to minimize harm to investors.

"You understand it was potentially harmful to Nortel and its shareholders for quarterly statement for Q3, 2003, to be delayed and not available to the public," he asked Ms. Sledge.

She replied that she knew it was.

Mr. Porter added the company had to protect its reputation in the market, and had to meet regulatory deadlines for filing its financial statements. She agreed.

Mr. Porter is cross-examining Ms. Sledge for the second day during the fraud trial of Mr. Dunn, former Nortel chief financial officer Douglas Beatty and former controller Michael Gollogly. The three men are accused of manipulating Nortel's financial statements in 2003 to trigger special "return to profitability" bonuses for themselves.

They have denied all the allegations and pleaded not guilty before Mr. Justice Frank Marrocco of the Ontario Superior Court.

In court Thursday, Mr. Porter also introduced minutes of a Nortel audit committee meeting in October, 2003, at which auditors from Deloitte & Touche briefed the committee on the thorough review being used for the restatement. One audit partner said "good processes were being utilized by management" in work on the restatement.

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Mr. Porter introduced a document showing Deloitte & Touche had charged $13.4-million in the third quarter for its work on the company's review of its balance sheet for the restatement, and it estimated in December, 2003, that it would bill another $10-million for the fourth-quarter work on the balance sheet review.

In the end, the company's 2005 shareholder proxy circular showed Deloitte was paid total audit fees of $55-million in 2003 and $46-million in 2004 – up from just $8-million in 2002.

Also Thursday, Mr. Porter questioned Ms. Sledge about one of the controversial accounting provisions the company had on its books in 2003, which was later reversed in its second restatement in 2005.

Earlier this week, she testified the so-called "out of balance" reserve was a point of contention and had been discussed at a meeting in Mr. Dunn's office in October, 2003, with auditors from Deloitte & Touche.

In the first quarter of 2003, Nortel had unwound $35-million of the "out of balance" amount and booked the money as income, leaving $50-million remaining on the books. The meeting in Mr. Dunn's office was to debate what to do with the remaining $50-million reserve.

During the meeting, she testified earlier, Mr. Dunn defended the validity of creating the reserve in the first place and suggested it should be unwound over time going forward, while the auditors wanted the reserve unwound immediately.

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Mr. Porter asked Ms. Sledge Thursday if Deloitte & Touche partner Don Hathway had suggested at the meeting that there was "no right answer" about how to deal with the reserve and there were arguments for and against its validity.

She said that was correct.

He asked if another audit partner who attended the meeting had expressed a different view – that the reserve was not appropriate. She said she could not recall who had expressed which views, but she agreed that auditors from Deloitte & Touche had expressed various opinions about the validity of the reserve and had known about its existence for years prior to 2003.

Ms. Sledge previously testified she believed such a reserve shouldn't have been created and didn't fit the definition of an appropriate accounting reserve.

She said the amount was eventually removed completely in Nortel's second restatement in 2005, but was unwound over a number of quarters in the first restatement in 2003.

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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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