Nortel execs say Deloitte approved of accounting

TORONTO Thu Jan 19, 2012 2:41pm EST

A sign is pictured outside Nortel's Carling Campus in Ottawa August 10, 2009. REUTERS/Blair Gable

A sign is pictured outside Nortel's Carling Campus in Ottawa August 10, 2009.

Credit: Reuters/Blair Gable

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TORONTO (Reuters) - Defence lawyers for three former Nortel executives charged with fiddling with balance sheets to trigger bonus payments on Thursday said the telecom equipment company's external auditor knew about major accounting adjustments and signed off on them.

The evidence submitted by defense attorney David Porter undermines the Crown's submission that former Chief Executive Frank Dunn, former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly had engaged in an elaborate fraud at the once-mighty company.

Instead, Porter's opening argument painted a scene of executives struggling to balance Nortel's books and manage the operations of a company left reeling from sinking sales after the dot-com crash.

Porter showed the court a string of correspondence between Nortel's finance team and Deloitte and Touche, its independent auditor for over a century, in which Deloitte raised concerns but ultimately approved of balance sheets featuring a surplus of so-called accruals, or liabilities calculated in prior quarters.

"The fact is that there was complete transparency with Nortel's auditor Deloitte and Touche," he said. "This openness and candor between Nortel management, the auditors and the audit committee speaks to honesty in dealings, not fraud."

With the company taking heavy losses, Dunn eliminated tens of thousands of jobs, sold plants, shut business lines and slashed costs.

The rapid restructuring created a complicated accounting environment in which future costs were estimated and recorded. If and when the costs eventually paid turned out to be lower than anticipated, those liabilities were then released, boosting earnings in subsequent quarters.

Nortel released more than $300 million of accrued liabilities in the first and second quarters of 2003, enabling the company to report profits in those periods after a series of losses and triggering combined payments for the accused of more than $8 million.

A series of financial restatements followed, shaking investor faith in Nortel's prospects and triggering numerous investigations. It filed for bankruptcy in 2009.

While the prosecution argues that Dunn and his team manipulated the books to claim the bonuses, the defense said such a fraud would have required the acquiescence of hundreds of accountants at both Nortel and Deloitte, an idea it called "preposterous."

The three men, if found guilty of fraud, face a minimum of two years in jail and a maximum of 14 years.

The case is The Crown vs Frank Dunn, Douglas Beatty and Michael Gollogly; Ontario Superior Court of Justice; court file number 10-00145.

(Editing by Frank McGurty)

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