Nortel takes heat from investors for accounting

Though Nortel Networks essentially closed the books on its year-long accounting problems earlier this month, the company faced a firing line of angry shareholders today in a combined 2004-2005 annual meeting.

“How come this board allowed this thing to happen so many times?” one shareholder asked about Nortel’s multiple financial restatements last year, eliciting wide applause from the audience at the start of the meeting’s question-and-answer session. “The board was not aware of anything. How come this total darkness has been raining on the company?”

“I came here to support the company, not to tear it apart,” said another investor. “But I can’t figure out why you feel this final audit is the right one. Number one was wrong, number two was wrong. Number three, you’re saying, is right. I’m not sure.”

Nortel fired its chief executive officer Frank Dunn and several other top executives last year amid an accounting scandal that is still being investigated by American and Canadian securities-trading authorities as well as the Royal Canadian Mounted Police. The company has since instituted several new accounting processes to prevent future accounting problems.

“No board could have found these problems,” said chairman L.R. “Red” Wilson, who, along with four other directors, have decided not to stand for re-election to the board.

When asked how the accounting scandal eluded the oversight of Nortel’s auditors, a representative from Deloitte & Touche said, “You need to understand that, in 2001 and 2002, the fundamental issue we had in our dialogue with the board and the old management team was the survival of the company. This company lost $30 billion [in the telecom bubble burst]. It was in free fall. The focus we had in dealing with the board was on stabilization of the business before the cash ran out.”

Nortel shareholders also submitted several proposals for vote regarding compensation policy, perhaps more fallout from the fact that the manipulation of executive bonuses was one of the principal causes of the company’s accounting scandal. In defense of the board and its management, Wilson pointed out that board members were paid in stock, not cash, during 2002 and 2003, and that management received no bonuses in 2001, 2002 or 2004, receiving bonuses in 2003 because it was the company’s first profitable year following the telecom bubble’s collapse.

Nortel management and board also took fire today for the recent resignation of two new senior executives, chief operating officer Gary Daichendt and chief technology officer Gary Kunis, who left the company only a few months after their appointment, due to what the company called “divergent management styles.”

“All of you interviewed [Daichendt and Kunis],” said one shareholder. “Did the question of their management style never come up? This really puzzles me.”

Nortel CEO Bill Owens replied that the company performed “a lot of due diligence” before hiring the two and that it was Daichendt’s decision to resign. “Not all these things work out,” Owens said. “That’s just the way it is.”