Tuesday, February 14, 2012

Fraud- Nortel trial- Nearly billiton dollars in reserves "incorrectly" booked

It is reported that Nortel conducted a comprehensive review and found out that nearly a billion dollars worth of accounting reserves ``incorrectly'' booked, dating to as far back as 1999. The internal review also found two ``material weaknesses'' tied to the use of the accrued liabilities, the first being a breach in public disclosure rules, the second a violation of Nortel's own accounting practices.

It is evident that certain management of Nortel had manipulated the results by using the accrued liabilities account.

$952 million in accrued liabilities were set up without the appropriate documentation, and weren't filed in accordance with generally accepted accounting practices (GAAP). Citing one account, called the ``out-of-balance'' provision that was stored within the firm's corporate or non-operating books, the accountant said: ``It's not warranted to have an out-of-balance account.''

Tens of millions of dollars in backlogged provisions were entered to cover anticipated costs such as contract liabilities and lawsuits. When those costs weren't realized, Nortel flowed the provisions back into earnings in later periods. Yet, they ``should have been recognized in real-time,'' not deferred.

This so-called ``earnings management'' practice was used by the three top executives in Nortel to tip the flagging tech giant back into profitability in 2003, triggering $73-million in bonuses, of which they collected $12-million combined.

1 comment:

Anonymous said...

It's easy to gather that impression from the sensationalistic initial coverage of the Nortel trial.

But if you take the time to read the most knowledgeable Canadian sources (Financial Post, Ottawa Citizen), you'll see that the situation is much more nuanced than it seems. In fact, it's far from "evident" that fraud or indeed any inappropriate manipulation occurred at all.

It's a very interesting trial and merits close attention.