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Nortel managers did not hinder auditors’ work, Cleghorn testifies

Former Nortel Networks Corp. audit committee chairman John Cleghorn leaves the court house in Toronto on June 21, 2012.

Fred Lum/Fred Lum/The Globe and Mail

Former Nortel Networks Corp. audit committee chairman John Cleghorn told a Toronto court he mediated an unusual volume of complaints between company executives and the firm's external auditors in 2003, but said no one in management tried to cut corners or hinder the auditors' work.

Testifying Friday at the fraud trial of three former Nortel executives, Mr. Cleghorn said he received complaints from both sides after Deloitte & Touche changed the two lead audit partners heading the Nortel file in September, 2002, and January, 2003.

"Nortel's quarter-ends and year-ends were about the noisiest I'd ever experienced," he testified before Mr. Justice Frank Marrocco of the Ontario Superior Court. "There was a lot of comment and discussion."

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Mr. Cleghorn is the former chief executive officer of Royal Bank of Canada, and was named to Nortel's board in 2001 as the tech company was struggling with enormous losses.

He was the final scheduled Crown witness at the long-running trial, which began in January, although Crown attorney Robert Hubbard said Friday he anticipated filing a report on Monday by an accounting expert.

Under cross-examination Friday by lawyer Harry Underwood, who is representing former Nortel CEO Frank Dunn, Mr. Cleghorn said he does not recall management complaining about Deloitte & Touche while the prior audit partners were in place, and said the tension seemed to begin with the audit of the fourth quarter of 2002.

Mr. Cleghorn said there were complaints about both sides not getting information quickly enough or making decisions quickly enough. But he told Mr. Underwood he did not recall management ever complaining that the auditors were being too strict.

"I don't remember that being said just like that," Mr. Cleghorn testified.

"You don't remember management ever complaining about auditors scrutinizing the books too closely?" Mr. Underwood asked.

Mr. Cleghorn said he did not. "That would be a red flag if somebody said that, because what's wrong with scrutinizing the books too closely?" he replied.

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Mr. Dunn, former Nortel chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of manipulating Nortel's accounting reserves in 2002 and 2003 to push the company to profitability and trigger special bonuses for themselves. The men have denied all the allegations, and have said the accounting decisions were all approved by Deloitte auditors.

In his testimony Friday, Mr. Cleghorn said he disagreed with earlier testimony at the trial from Deloitte auditor Don Hathway, who said Nortel's audit committee seemed more interested in getting financial statements approved on schedule than in getting them right.

Mr. Cleghorn said the audit committee independently hired external investigators in 2003 to probe Nortel's use of accounting reserves, even though the investigators said they could not give assurances about when their work would be completed. That investigation ultimately led to the dismissal of Mr. Dunn and other top executives.

"If we were only interested in deadlines and not getting it right, why would we have gone into an external review [with no deadline for its completion]?" Mr. Cleghorn said. "We wanted the financials right first. If the auditors were not happy, we were not happy."

He also testified that Mr. Dunn fully supported a decision to launch a comprehensive review of the accounting reserves being carried on Nortel's books in 2003, which led to a financial restatement later that year.

"There was never any suggestion on the part of anybody in management that we shouldn't do it right [or] we should cut corners," Mr. Cleghorn said.

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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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