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Nortel's use of accounting reserves out in open: defence

A former executive in the wireless division at Nortel testified on Wednesday that an accounting reserve – a provision set up to cover an anticipated future cost – could not be released unless he was 100-per-cent certain the liability no longer existed.

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

All accounting reserves used at Nortel Networks Corp. to help meet profit targets were legitimate releases that were openly disclosed and justifiable to auditors, a lawyer for former chief executive officer Frank Dunn suggested at his fraud trial Wednesday.

Lawyer Sarit Batner, who is part of the legal team representing Mr. Dunn, focused on the controversial use of accounting reserves at the company during cross-examination Wednesday of Crown witness Jim Kinney, former vice-president of finance in the company's wireless division.

"If you were short on your numbers and needed to make a release [of reserves] you had to do due diligence to ensure the release could be made," she suggested to Mr. Kinney.

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Mr. Kinney agreed, adding his "cardinal rule" was that an accounting reserve – which is a provision set up to cover an anticipated future cost – could not be released unless he was 100-per-cent certain the liability no longer existed.

Mr. Kinney is testifying at the Toronto fraud trial of Mr. Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly, who are accused of manipulating reserves in 2002 and 2003 to trigger a profit at the struggling telecom giant and ensure they would be paid special "return to profitability" bonuses created for executives.

Lawyers for the three executives have denied the allegations and have said the reserves were used legitimately and the company's external auditors at Deloitte & Touche approved the decisions.

Ms. Batner's questions Wednesday appeared to acknowledge that Mr. Kinney's wireless division may have used releases of reserves to meet its profit targets, but she suggested any such moves would have had to involve reserves that were legitimately available for release.

Ms. Batner also showed Mr. Kinney an array of internal documents related to an extensive review in 2002 of the reserves being carried on the wireless division's books. She suggested "dozens, if not hundreds" of people were involved in determining which reserves were out of date and "releasable," noting the process was extremely open and transparent.

She noted the use of reserves at the company was "under a microscope" by the fourth quarter of 2002.

Mr. Kinney agreed, saying it was "a very inclusive process."

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Ms. Batner also asked him whether he was ever told there was a plan by senior executives to reduce profit to a loss in the fourth quarter of 2002 and then target future quarters in 2003 for provision releases to create a profit in that period – allegations levelled by the Crown in the case.

Mr. Kinney said he had never heard of such a plan. And he agreed he had not heard of anyone "saving" reserves on the books to use in future quarters if needed to make targets.

He added he was never asked by the three accused to find reserves that could be manipulated to meet profit targets.

Mr. Kinney also said Deloitte & Touche never suggested anything was wrong with the way reserves were being used by his division, or that things should be done differently – until staff were told in July, 2003, to change the way provisions were used.

Mr. Kinney testified he was suspended from his job at Nortel in April, 2004, and fired four months later in August. His suspension came at the same time the three top executives were fired following an internal investigation of accounting concerns at the company.

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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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