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Nortel finance employee testifies about reserve request

A Nortel employee testified that he was asked to make a new reserve for excessive and obsolete inventory of $35-million (U.S.) for the fourth quarter of 2002.


A third former Nortel Networks Corp. finance employee has testified about a head office campaign to find new accounting reserves to book in 2003, saying he was asked to submit provisions for the fourth quarter of 2002 after he had already sent in his final numbers for the period.

Ken Crosson, Nortel's former vice-president of global operations, is the third Nortel employee to tell the Toronto fraud trial of three former Nortel executives about receiving a request to create new reserves in early 2003, lowering the company's profit for the period as a result.

He testified Monday he got a phone call at his office in Raleigh, N.C., in January, 2003, from former Nortel planning director Brian Harrison asking him to create two new accounting reserves, even though he had already closed the books for his division for 2002. He said he had never received such a request before, and said he would not have submitted the provisions if he hadn't been asked.

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Mr. Crosson is testifying at the fraud trial of former Nortel chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly. The men are accused of manipulating Nortel's financial statements in the first and second quarters of 2003 to report a profit and trigger special "return to profitability" bonuses for themselves.

The Crown alleges the men took the unusual step of arbitrarily creating more than $200-million (U.S.) in new accounting provisions in the fourth quarter of 2002 to push the company from an unexpected profit to a loss for the period. The Crown contends they did not want a profit in 2002 because they believed it would not help them collect their full bonus under the executive plan, so they instead pushed the profit into the first and second quarters of 2003 to make the bonus payable at that time.

Mr. Crosson testified he was not told why Nortel wanted to book more reserves in January, 2003, but said it was not hard to comply. Nortel had a provision for $1-billion of excessive inventory at the time, and the business was in difficulty, so it was not hard to do paperwork to justify an additional $30-million inventory reserve.

"The $30 [million]you could easily support one way or the other because of all the variables," he said.

Mr. Crosson, who was in charge of managing the company's inventory of parts and products, said he initially proposed a $35-million (U.S.) provision for excess inventory, but the amount was later amended by head office to $30-million, and then reduced to $5-million after the company discovered it had another unexpected charge and didn't need as large an inventory charge.

At the same time, Mr. Crosson said he was also asked to submit a second new provision of $27-million related to a contractual obligation to provide work to Perot Systems that Nortel had not fulfilled. He said he hadn't previously proposed the Perot provision because Nortel was still trying to negotiate a contract extension with Perot.

"I didn't feel at that time, in my judgment, that I wanted to go forward and request a provision when there was a possibility we could get an extension," he said.

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However, under cross-examination from David Porter, a lawyer representing Mr. Dunn, Mr. Crosson agreed he would never suggest creating a provision if there was not a good rationale for it or if it would not withstand scrutiny by auditors.

He also agreed he was not given a specific dollar target he needed to reach.

"I felt my [existing]provisions were in a range I could live with. But because it's a range, I could also support a higher number," he told Mr. Porter.

The trial has previously heard that the new inventory provision and Perot provision were both later reversed when Nortel did two subsequent restatements of its books in December, 2003, and January, 2005.

The Crown has alleged the three accused executives were aware of the details of the new reserves the company was creating, and discussed them in e-mails in early 2003.

Crown attorney Amanda Rubaszek showed Mr. Crosson an e-mail sent by Mr. Beatty to Mr. Gollogly on Jan. 12, 2003, in which Mr. Beatty said he had met with Mr. Dunn and the CEO didn't like the way they were planning to record the new $30-million inventory provision. The e-mail said Mr. Dunn wanted some of it to be allocated to another business project known as GVT rather than to excess inventory.

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Asked by Ms. Rubaszek if there was any business connection between GVT and the excess inventory provision, Mr. Crosson replied, "Not that I'm aware of." Mr. Crosson added the backup documents he had prepared to explain the new inventory provision to the company's external auditors had not mentioned GVT.

Mr. Crosson also testified he had gotten to know Mr. Dunn and Mr. Beatty after working at Nortel for 28 years, and spoke often to Mr. Beatty in his work. He said both men had extremely good knowledge of accounting and Nortel's numbers.

"Mr. Dunn is a very competitive person – a very aggressive person," he recalled.

"And Doug's office would be very close [to Mr. Dunn's] and he would be given direction frequently on things that weren't even his. Doug would say, 'Frank is anxious today, Frank is being aggressive today.'"

Mr. Crosson testified he was fired from Nortel in June, 2003, over a dispute about his reporting of a stock option transaction, which he said was deemed a violation of the company's procedures.

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About the Author
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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