Nortel’s accounting far from fixed

After restating its financial reports for a third time in March, Nortel Networks admitted in regulatory filings today that its accounting procedures remain significantly flawed.

“We have concluded that our internal control over financial reporting was ineffective as of Dec. 31, 2005,” Nortel wrote in its annual 10-K filing. “Material weaknesses remain unremedied, which could continue to impact our ability to report our results of operations and financial condition accurately and in a timely manner.”

Nortel and its independent accountants identified five remaining material weaknesses in its accounting: a lack of compliance with Nortel’s own written procedures; a lack of compliance to Nortel procedures for applying generally accepted accounting principles (GAAP) to the initial recording of some liabilities (specifically in the areas of accounting for contingencies and translating foreign currency); a lack of personnel with sufficient knowledge, experience and training in U.S. GAAP (including insufficient analysis and documentation of GAAP’s application to revenue reporting and other transactions); a lack of “clear organization and accountability” in the accounting ranks (including financial reporting systems that require too much manual intervention); and Nortel personnel’s insufficient awareness or remedial response to internal control issues.

“These material weaknesses, unless addressed, could result in accounting errors such as those underlying the third restatement and our prior restatements,” Nortel’s filing said. Though Nortel’s previous restatements prompted it to institute improved reporting and control procedures, the company has been unable to address the five remaining problems, which “may continue to remain unremedied for some time,” Nortel said.

Late last week, Nortel released restated earnings whose impact was larger than previously indicated. The equipment vendor reported total revenue adjustments of $1.477 billion, though it previously had reported $1.216 billion. And it reported a negative impact to earnings of $531 million, though it had previously reported that impact to be $378 million.

Nortel’s accounting is still being investigated by the Dallas division of the U.S. Attorney’s Office, the Royal Canadian Mounted Police, the U.S. Securities and Exchange Commission and the Ontario Securities Commission.