Nortel comes clean

A report commissioned by Nortel Networks and conducted by the law firm Wilmer, Cutler, Pickering, Hale & Dorr confirmed last week what many analysts had suspected — that Nortel manipulated its earnings reports in 2002 and 2003 to control the payment of “return to profitability” bonuses. To avoid paying the bonuses at the end of a bad year, former CEO Frank Dunn (who instituted those bonuses) took advantage of accounting errors the company discovered to report a loss in 2002's fourth quarter, though Nortel had actually turned a profit then, the report said. In the first two quarters of 2003, Nortel used those same accounting errors to report profits where there were none in order to trigger the bonuses.

Less than two years later, the restatement of Nortel's finances has consumed at least $100 million, 80 board meetings and the work of more than 600 full-time employees, said Nortel's current CEO, Bill Owens.

Nortel has demanded repayment of those bonuses from Dunn and nine top finance officers. But in a letter to departing chairman L.R. “Red” Wilson last week, 12 executives took the rare step of promising to repay their 2003 RTP bonuses in full (totaling $8.6 million) over the next two years. Though they did not personally engage in improper conduct, they asserted, they will repay the company “as a matter of corporate leadership and integrity.”

Nortel investors are probably more encouraged by the coming replacement of five board members (including the chairman) than that gesture. Only one new board member has joined Nortel in the past two years (replacing Dunn) and only three new executives have been added under Owens' management. In addition to various procedural accounting oversights, the Wilmer Cutler report chided Nortel for entrusting its finances to “‘career’ Nortel employees [who] learned accounting at Nortel,” a charge that could apply to Dunn himself, who joined Nortel immediately after college in 1976.