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Transcript of Nortel Scandal
They had been accused of creating a scheme in 2002 and 2003 that triggered $12.8-million worth of bonuses for themselves while Nortel stock continued to tank, eventually becoming worthless as the company collapsed into bankruptcy.
Overview of the Corporation
Summary of the Scandal
Nortel executive management perpetrated a massive accounting fraud in the early 2000. The executives of the company cooked up a scheme between 2002 and 2003 that netted them bonuses of $12.8 million at the same time that Nortel stock was decreasing in value. The stock fell to the point of becoming worthless and the company went into bankruptcy. The accountants at Nortel would not report all the accruals of the company at once and would release a portion in each quarter to make their quarterly statements look good and make the company look profitable. The accountants also held back cash reserves with legitimate reasons.
Three of the main people who were involved in this scheme was the former chief executive Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly. They were trying to cover up the fraud by saying that the company restatement was caused from the internal errors in their server.
Although, the judge did not meet the burden of proof required to find the 3 men guilty.
Due to the scandal some employees were laid off and forced to take on extra work with no bonuses. Stock price went down and approximately 60,000 employees lost their jobs.
Despite the scandal the organization still exists. Infact, the Nortel organization depreciated the value of Nortel and tarnished its image.
As of 2009, Nortel is still alive today but with the aid of the bankruptcy protection. Nortel will restructure its business to generate some free cash.
Transactions should be recorded at the time they were made (Revenue Recognition Principle)
The use of Internal controls for cash in order to protect assets from theft.
Reconcile bank accounts to the general ledger on a monthly basis
Matching bank records with the company’s statements.
Three top Nortel Networks Corp. executives accused of defrauding the company and its investors acquitted in Fraud Trial:
Frank Dunn (former chief executive)
Douglas Beatty (former chief financial officer)
Michael Gollogly (former controller)
They were also known as CEO, CFO, and a senior employee. They had access in the company’s information and had the company’s trust.
Some employees from the company such as Deloitte and Touch LLP from the auditing company who suspected such suspicious situation yet have not reported or alerted anyone about it till 2003. The reason why they manage to hide this scheme was because of large group of seniors and Design of the Audit.
Scandal Methodology (PART 2)
The scam lasted about 10 years. From 2000-2010.
Cash cheques and share certificates shipped out in two separate mailings are now en route to an estimated 145,000 Canadian claimants. It is finally pay day for shareholders who won a $2.4-billion (U.S.) global class-action settlement from Nortel Networks Corp. two years ago.
Nortel filed for bankruptcy protection in mid-January 2009 with about $2.4 billion in cash on its balance sheet
Nortel said in February, 2009 that it was cutting another 3,200 of its remaining 30,000 global workers. Started at 90,000 employees.
Nortel’s competition such as Apple, Google, Microsoft and others all fought in a bid war to buy Nortel due to the value of the company plummeting.
Nortel customers were forced to be bought out by the highest bidder. Ended up going for $3 billion
IFRS Rules and Financial Statements
The objectivity principle: An accounting principle that states that a company's financial information must be based on verifiable data. (Didn’t show proof of profits.)
Principle of conservatism: provides that accounting for a business should be fair and reasonable. Accountants are required in their work to make evaluations and estimates, to deliver opinions, and to select procedures. (Overestimated profits for capital to seem larger.)
Revenue recognition convention: determines the specific conditions under which income becomes realized as revenue. (Didn’t show returns)
Financial statements affected TSX in June 2009, at a measly 18.5¢ a share and August 2000, its stock was worth $124.50 a share
Type of Business
Nortel Networks Corporation provides product and service in the communication industry, such as networking hardwares and softwares along with diagnostics solutions, to service providers and enterprise customers worldwide.
Products and Services
Nortel IP Phone 1140E
Metro Ethernet Routing Switch 8600
Nortel FAST Stacking
Nortel Speech Server
Nortel Optical Multiservice Edge 6500
Passport Carrier Release
Location of the Company
Size of the Company
Nortel does business in more than 150 countries around the world.
It has 201-500 employees
Description of the Company
Nortel Networks Corporation, formerly known as Northern Telecom Limited, was a multinational telecommunications equipment manufacturer. It was once the most valuable Canadian company and made up about one third of the Canadian stock exchange market value during it's peak
5945 Airport Road
Canada L4V 1R9
Description of the Scandal Methodology (PART 1)
What was the specific accounting scandal that occurred?
July 2003 = auditor Deloitte and Touche LLP first alerted the company’s audit committee to suspicious behavior for certain establishments and accumulations on Nortel’s balance sheet.
2010 – discovered and due to the loss of funds the company was forced to file a bankruptcy.
What was the scandal?
The Nortel scandal was a long chain of fraudulent events that happened in the early 2000’s.
Why did they do it?
“the companies restatement was from internal errors in the server” – Frank A. Dunn