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Alleged Accounting Fraud at Nortel Networks Corporation
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W12147
ALLEGED ACCOUNTING FRAUD AT NORTEL NETWORKS CORPORATION1
Christine Liu wrote this case under the supervision of Professors Darren Henderson
and Chris Sturby solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial
situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction,
storage or transmission without its written permission. Reproduction of this material
is not covered under authorization by any reproduction rights organization. To order
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copies or request permission to reproduce materials, contact Ivey Publishing, Richard
Ivey School of Business Foundation, The University of Western Ontario, London,
Ontario,
Canada,
N6A
3K7;
phone
(519)
661-3http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html208; fax (519) 661-3882;
e-mail cases@ivey.uwo.ca.
Copyright ? 2012, Richard Ivey School of Business Foundation Version: 2012-08-20
In early January 2009, Michael O’Neil sat down to ponder his investment in the common
shares of Nortel Networks Corporation (Nortel). Michael O’Neil had invested a
substantial amount in Nortel shares in late 2000. With the company recently filing
for bankruptcy protection in Canada and the United States, he had almost certainly
lost all of his original investment. After a series of weak financial results,
Nortel’s share price had experienced a dramatic downward spiral over the past few
years. Compared to the peak price on the New York Stock Exchange (NYSE) of US$143.06
on March 27, 2000, the shares were now virtually worthless (see Exhibit 1 for a chart
of Nortel’s stock price). After O’Neil acquired his shares in 2000, the company
was
investigated
by
the
Ontario
Securities
Cohttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlmmission (OSC) and the U.S.
Securities and Exchange Commission (SEC). In 2007, Nortel reached settlements in
which the company admitted to a series of inappropriate accounting practices. Looking
back at his losses, O’Neil wondered whether there were any signs showing that
Nortel’s reported earnings were inflated and that their financial statements did
not faithfully portray the underlying reality of the company’s financial condition.
If he had detected such signs earlier on during the term of his investment, perhaps
he could have avoided a complete loss. O’Neil compiled the company’s financial
statements from the period of 1995 to 2003 (see Exhibits 2 to 4) and started his
analysis.
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COMPANY HISTORY2
In 1895, the Northern Electric and Manufacturing Co. (Northern Electric) was founded
to supply various electrical equipment for Canada’s newly established telephone
system.
In
1914,
Northern
Electric
merged
withttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlh The Imperial Wire and
Cable Company to form The Northern Electric Company Limited (Northern). This newly
formed entity was 44 per cent owned by Western Electric, a subsidiary of the American
1
This case has been written on the basis of published sources only. Consequently, the
interpretation and perspectives presented in this case are not necessarily those of
Nortel Networks Corporation or any of its employees. 2
The
sources
for
the
following
historical
outline
are
http://www.nortel-canada.com/about/history/;
http://www.nortel-canada.com/about/history/1900-to-1939/;
http://www.nortel-canada.com/about/history/1940-to-1969/;
http://www.nortel-canada.com/about/history/1970-to-1999/;
and
http://www.nortel-canada.com/about/history/2000-to-present/; accessed on August 6,
2012.
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by Schumann
from March
2013 to Shttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmleptember 2013.
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9B12B023
Telephone and Telegraph Company (AT&T), and 50 per cent owned by Bell Canada. By the
1920s, Northern had distribution houses in all major Canadian cities and began to
introduce products including vacuum tubes, consumer radios and moving-picture sound
systems. During the recession following the stock market crash of 1929, Northern was
forced to lay off 66 per cent of its staff. In 1937, Northern introduced the
predecessor to more modern corporate phones. Then, in 1949, the American justice
department forced AT&T to split off Northern; AT&T sold its 44 per cent interest to
Bell Canada. Subsequent to the split, Northern had to rely on itself for technological
innovation and began to invest heavily in research.
In the 1960s, Northern published the first paper assessing whether glass fibres could
be used to carry informatihttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlon.
Northern also introduced the SP-1 switching system that made significant inroads into
the U.S. market. In the 1970s, Nortel went public, with Bell Canada reducing its
ownership interest to 90 per cent. Further, Northern introduced a full-featured
digital switch that allowed it to rise to global prominence. Through the 1980s,
Northern continued to expand around the world, increasing its U.S. employee base to
19,000 and establishing operations in Japan and China.
In 1995, Northern introduced the Nortel brand in celebration of its centenary
anniversary. As well, the company began to move into the fast-moving Internet services
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sector. It was the first company to introduce the 1-Meg modem. Nortel spent US$2.6
billion on research and development (R&D) in 1996.
In 2000, Nortel became independent when Bell Canada spun off the bulk of its interest
to its shareholders. Also in 2000, Nortel was selected as Canada’s “best
plhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlace to work” by Report on
Business magazine. Nortel achieved revenue over US$30 billion and spent US$4.0
billion on R&D. 3
THE TECHNOLOGY BOOM
In order to keep ahead of the technology boom of 2000, Nortel went through drastic
restructuring to outsource its manufacturing capabilities to other businesses and
went on a buying spree. It often used its own share capital to acquire smaller players
in the industry in order to take advantage of their R&D capabilities. In 2000 alone,
Nortel acquired 11 companies for a total of US$19.7 billion.4 These strategic
transformations initially did help boost the telecom equipment maker’s performance
in the market. It was estimated that Nortel’s products carried 75 per cent of the
Internet traffic in North America near the end of the 1990s.5
The competitive landscape in the telecom sector consisted of several large players
and
numerous
specialized
smaller
players.
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlDemand was largely dependent
on consumers’ disposable incomes and businesses’ profitability because technology
products and services were expensive to purchase and maintain. The profitability of
companies in this industry was highly driven by the ability to innovate by developing
and marketing new products and services. It was a capital-intensive business, which
gave large corporations with positive cash flows and low borrowing costs an advantage
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in acquiring leading-edge research facilities and manufacturing equipment. Nortel’s
major direct competitors were Cisco Systems Inc. and Lucent.
Perceived to be an Internet company, common shares of Nortel participated in the
“dot-com bubble” during the late 1990s that propelled valuations to extreme highs.
At one point, the company alone made
34
Nortel Networks Corporation 2000 Annual Report, p. 6 and 45; obtained from
http://www.sedar.com.
Ibid, p. 58. 5
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlhttp://www.nortel-canada.com
/about/history/1970-to-1999/.
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9B12B023
up more than 35 per cent of the value of the Toronto Composite Index (TSE 300) during
the technology boom.6 The fluctuations in Nortel’s performance virtually dictated
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the rise and fall of the Canadian stock market. However, with the powerful “Nortel
effect” also came the risk that if the company ever performed poorly, the entire
index would fall along with it.7 This was exactly what happened on October 25, 2000,
when Nortel’s CEO, John Roth, issued the first of a series of sales warnings, and
the stock tumbled from Cdn$96.10 to Cdn$71.55, causing the TSE 300 to fall by 840
points
in
a
single
day.8
Then
throughout
2001,
Nortel
experiehttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlnced even more sales
decreases and began a number of layoffs that reduced its global workforce by nearly
50,000 employees.9 Roth stepped down as CEO in that year and was replaced by Frank
Dunn. Nortel’s stock price ended 2001 at Cdn$11.90.10
Due to a general decline in the technology industry, the company’s major customers,
such as service providers as well as telephone and data carriers, lost much of their
own bottom-line profitability. Consequently, they required less equipment from
Nortel, which negatively impacted Nortel’s sales and earnings. Further, most of the
companies that Nortel had spent billions of dollars acquiring significantly dropped
in value. By the end of 2001, the company was forced to announce a series of further
job cuts. Despite its efforts to reduce costs, Nortel still suffered a huge loss of
US$27.3 billion in fiscal 2001.11 In the following year, the company’s long-term
debt
was
downgraded
stahttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmltus
to
by
junk
Moody’s
and
Standard & Poor’s.12 By September 2002, Nortel’s shares had plunged by more than
99 per cent to US$0.54 from its all-time high just two years earlier.13
In April 2003, Nortel reported its first quarterly profit in three years, and its
business seemed to be recovering.14 In October of the same year, however, the company
announced the first of
a series of four restatements that were issued between 2003
and 2007.15 Further, regulators investigated the company’s accounting practices,
leading to a US$35 million settlement with the SEC in October 2007 and a Cdn$1 million
settlement with the OSC in May 2007.16 The SEC also filed civil fraud charges against
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certain former Nortel employees. Finally, Nortel paid US$2.4 billion in cash and
shares to settle class-action lawsuits with investors who alleged that Nortel had
committed accounting fraud.17 Exhibit 5 summarizes some of the key dates in Nortel’s
corporate hishttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmltory.
11, 2001. 7
Barry Critchley, “Active Manager was King in 2000,” Financial Post Investing,
Toronto, February 13, 2001. 8
Michael Lewis, “Global Telecoms Tremble as Nortel Shock Spreads: Will Roth Deliver
– Or Crash and Burn?: Credibility on 9
Caroline Alphonso, “Nortel Stock Sinks to 6?-year Low,” The Globe and Mail, Toronto,
April 6, 2002.
10
Canadian Financial Markets Research Centre, accessed on August 6, 2012. 11
Nortel 2001 Annual Report, p. 57. 12
Simon Tuck, “Nortel Debt Cut to ‘Junk’ Status; Downgrade Pushes Stock to 6-year
Low,” The Globe and Mail, Toronto, April 5, 2002. 13
The Center for Research in Security Prices monthly stock file, accessed on November
6, 2011. 14
Nortel Networks Corporation 2003 First Quarter Shareholders Report, p. 1, obtained
from http://www.sedar.com. 15
David
Friend,
“Nortel
to
Restate
Results
Over
New
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Erhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlrors; Telephone Equipment
Maker to Delay Filing with U.S. 16
Chris Sorensen, “Nortel Settles with SEC; Telecom-gear Maker Agrees to Pay $35
Million U.S. in a Deal That Will 17
David Voreacos and Cynthia Cotts, “Judges OK US$2.4B Settlement from Nortel: Cash,
Shares Deal to Repay Investors 6
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ALLEGED ACCOUNTING FRAUD AT NORTEL
O’Neil first attempted to understand the underlying accounting issues at Nortel by
reading documents filed by the OSC and the SEC. He obtained a copy of the “Settlement
Agreement Between Staff of the Ontario Securities Commission and Nortel”18 as well
as a copy of the civil securities fraud complaint filed by the SEC against four
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formhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmler Nortel executives.19
Revenue Recognition
The OSC settlement stated that Nortel, driven by the need to meet targeted revenue
and earnings targets for the fiscal year ended December 31, 2000, had inappropriately
changed revenue recognition policies.20 This was accomplished in part by the use of
“bill and hold” transactions, where revenue is recognized prior to delivery of a
product. The SEC alleged that Nortel approached certain customers to execute
so-called “risk of loss” letters that would result in the recorded sale of inventory
in 2000 for items shipped subsequent to year end.21 This was in direct conflict with
U.S. GAAP, which required that such transactions be initiated by buyers (not sellers).
See Exhibit 6 for U.S. GAAP requirements for bill and hold transactions. Nortel was
so successful in meeting its revenue targets via these transactions that it later
allegedly
reversed
certain
trahttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlnsactions
low-margin
in
order
to
reduce revenues while maintaining earnings.22
The SEC also alleged that Nortel improperly recognized revenues via its subsidiary
Telamon Corporation (Telamon). Certain customers of Nortel were required to make a
percentage of purchases from minority- or women-owned businesses.23 As a result, they
would make purchases from Telamon (as a “pass-through entity”) instead of Nortel
because Telamon met the necessary criteria. Nortel allegedly recognized revenue when
merchandise was shipped to Telamon, despite the fact that it continued to assume the
risks and rewards of ownership of the inventory. In substance, such sales were
consignment sales and should have been accounted for as such.
As a result of these alleged transactions, Nortel met its financial expectations for
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the fourth quarter of 2000. This included reported revenue of US$8.8 billion for the
quarter (34 per cent higher than 1999).24
://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlrProvisions
The OSC settlement also stated that Nortel had improperly recorded and released
certain accrued liabilities and provisions in order to meet various profitability
targets.25 U.S. GAAP dictated that contingent liabilities could be recorded when it
was probable that an amount would be paid and that the amount could be reasonably
estimated. In addition, where a possible range existed, it would be appropriate to
record the liability at the bottom end of the range.26
18 19
http://www.nortel.com/corporate/investor/collateral/set_20070516_nortel_networks
.pdf,
accessed
November
7,
2011.
http://www.sec.gov/litigation/complaints/2007/comp20036.pdf, accessed November 7,
2011. 20
The Ontario Securities Commission (2007), “Settlement Agreement Between the Staff
of the Ontario Securities Commission and Nortel”, Toronto, p. 3. 21
U.S,
District
Court
for
the
Southern
District
of
Nehttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlw York, Civil Action No.
07-CV-2058, p. 17-18. 22
Ibid, p. 21. 23
Ibid, p. 19-20. 24
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Ibid, p. 23. 25
Ontario Securities Commission, “Settlement Agreement,” p. 3-4. 26
Under IFRS, when no point in a range is most likely, firms would accrue a liability
at the mid-point of the range.
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In the middle of 2002, Nortel began to suggest to the investment community that it
would return to profitability by the second quarter of 2003. As 2002 unfolded, it
became clear that the company would actually be profitable in the fourth quarter of
2002 on a pro forma basis, and this would trigger the payment of bonuses to various
executives.27
The
SEC
alleges
Nortelhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html
that
created
unsubstantiated reserves to reduce 2002 profitability to avoid becoming profitable
before management’s projections. Further, the SEC alleges that reserves were
released in 2003 to help meet earnings expectations. 28
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EVALUATION OF NORTEL’S FINANCIAL REPORTING QUALITY
After reading about Nortel’s alleged accounting manipulations, O’Neil looked at
the company’s financial statements to evaluate the quality of its financial
reporting. He knew that high-quality financial statements would help users make
capital allocation decisions and to assess management’s stewardship of the
company’s assets. Ideally, the statements should help users predict the entity’s
ability to generate future cash flows. While GAAP earnings were generally perceived
to be the most useful metric to meet these needs, O’Neil recognized that GAAP earnings
were subject to substantial discretion due to the choice of accounting policies
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmland accounting estimates.
O’Neil began specifically to consider potential red flags and warning signs related
to the misstatements of revenues and provisions. For revenues, he considered the
relationship between the company’s income statement and cash flow statement.
High-quality earnings should be supported by cash flows from operations. O’Neil
wondered what red flags would indicate that revenues were recognized prematurely.
For provisions, O’Neil considered examining the degree to which the company made
discretionary accruals (i.e., estimates of future expenditures for which management
is recording a provision). Starting with the balance sheet, he considered examining
net operating assets (NOA) defined as the difference between operating assets (total
assets less cash) and operating liabilities (total liabilities less total debt).29
Generally, this would isolate the assets and liabilities to which any discretion
cohttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmluld be applied. He would
then look at the absolute change in NOA from one year to the next to see whether
accruals had changed materially. By dividing this change by the average NOA over the
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two years being examined (average NOA), O’Neil would be considering significant
growth or contraction that could affect NOAs independent of management discretion.
Overall, this analysis would provide him with a balance sheet accruals ratio that
would measure the magnitude of change in a company’s discretionary accruals compared
to its net asset base. A higher accruals ratio would suggest lower quality earnings.
Balance Sheet Accruals Ratio = [NOA(this year) – NOA(last year)] ÷ Average NOA
Instead of using the balance sheet, O’Neil could also measure accruals using the
cash flow statement. He could assess the difference between net income and the sum
of cash flow from operations and cash flow from investing.30
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlCash Flow Statement Accruals
Ratio = [Net Income – (CF from operations
CF from investing)] ÷ Average NOA
2728
Ibid.
U.S. District Court, Civil Action No. 07-CV-2058, p. 32-40. 29
Institute, Charlottesville, 2011, p. 364-68. 30
Ibid.
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O’Neil knew that any such analysis would have to be placed in context, which would
mean considering the company’s trend over a period of time and comparing this to
other companies operating in the same industry.
NORTEL’S CORPORATE CULTURE AND THE SARBANES-OXLEY ACT
In the aftermath of Nortel’s restatements, in October 2003, the company’s audit
committee
initiated
an
ihttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlndependent review with the
help of numerous external consultants. The goal of the review was to understand why
the financial statement misstatements had occurred and to find ways to ensure that
misstatements would not recur. The independent review made note of negative
characteristics that were pervasive within the management, organizational structure
and internal controls of Nortel:
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? “Management “tone at the top” conveyed the strong leadership message that
earnings targets could be
met through application of accounting practices that finance managers knew or ought
to have known were not in compliance with U.S. GAAP and that questioning these
practices was not acceptable;
? Lack of technical accounting expertise which fostered accounting practices not in
compliance with
U.S. GAAP;
? Weak or ineffective internal controls which, in turn, provided little or no check
on inaccurate://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlar
financial reporting;
? Operation of a complicated “matrix” structure which contributed to a lack of clear
responsibility and
accountability by business units and by regions; and
? Lack of integration between the business units and corporate management led to a
lack of
transparency regarding provisioning activity to achieve internal EBT [earnings
before tax] targets.”31
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By the 2004 fiscal year, Nortel was required to report under the provisions of the
Sarbanes-Oxley Act (SOX). Among other requirements, SOX required companies to assess
the design and operating effectiveness of internal controls over financial reporting
(ICOFR) and to have external auditors express an opinion on management’s assessment.
In its first ICOFR audit, Nortel identified a series of material weaknesses that
suggested deficiencies in the company’s financial reporting environment. These
weaknesses werhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmle not unlike
those identified by the 2003 independent review. As a result, the company’s auditors
concluded in their audit report that Nortel had not maintained effective internal
control over financial reporting.
O’Neil read the SOX audit report and related internal control weaknesses. SOX had
been implemented subsequent to his purchase of Nortel common shares; however, he
wondered how this increased disclosure would have affected his investment decision
had he known about Nortel’s control environment earlier.
CONCLUSION
It was now January 2009, and Nortel had just filed for bankruptcy protection in the
United States and Canada. Looking back at his investment in Nortel, O’Neil felt both
regretful and confused. Where had he gone wrong? When he purchased the company’s
stock, they were trading at well above $100 per share. Yet now, the shares were
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virtually
worthless.
After
exahttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlmining the OSC and SEC
reports on Nortel, O’Neil wondered if there were clear red flags that he could have
seen by examining the company’s financial results and disclosures in more detail.
O’Neil hoped to learn from this situation so that he would be more vigilant when
evaluating future investing decisions.
31
Nortel Networks Corporation 2003 Annual Report, p. 96.
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9B12B023
Exhibit 1
NORTEL MONTHLY STOCK PRICE CHART
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Source: The Center for Research in Security Prices monthly stock file, accessed on
November 6, 2011
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This document is authorized for use only by Minwen Sun in Fraud Preventin 2013 taught
by Schumann
from March
2013 to September 2013.
)3002–7991( stropeR launnA letroN :ecruoS
For the exclusive use of M. SUN
Page 9
9B12B023
Exhibit 3
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NORTEL NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS At December 31 (in millions
of U.S. dollars, except for per share amounts)
Restated
2003 2002 2002 2001 2000 1999 1998 1997 1996
Assets:
Current Assets
Cash
and
ST
investments
4,064
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html4,042 4,065 3,467 1,571 2,257
2,281
1,371 730 Accounts Receivable 2,504
4,880 4,091 Inventories 1,190
Prepaid expenses and other 315
369
798 797 1,401 739 778
1,507 889 1,569 4,312 2,956
651 495 849 1,594 291
664
Current assets of disc. ops
8,532
5,462
1,765 1,679
155 94 Future income taxes
114 58 790
212 698
Long-term Receivables 203 1,819 1,567
521
223
1,687
376 276 Income taxes recoverable 90
9,341 8,510 11,699 16,380 13,068
563
2,229 1,994 2,925 8,164 6,786
10,317
573
8,547 6,870
334 527 Investments 139
203 224 253 808
285 202 Plant and Equipment – Net 1,651
1,692 1,441 2,461 3,354 2,458
2,263
2,040 2,035 Goodwill and Intangibles 1,440
1,389 1,112 1,405 8,693 4,520
5,620
853 942 Future income taxes 3,200 2,438 2,652 2,141 283 Other Assets 399
657 694 560 421
Total
Assets
438
495 327 Long-term assets of disc. ops
15,361
15,832
14,596
22,59http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html7
769
283
19,139
31,897
19,732
12,554
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10,903 Liabilities:
Current Liabilities Notes Payable
Trade and other payables Accrued Payroll
Other accrued liabilities Income taxes payable Long-term debt (current) Deferred
income Long-term debt
Future income taxes Other liabilities Total liabilities Minority interest
Shareholders' Equity: Preferred shares Common shares Retained earnings
Additional paid-in capital Currency translation adj Total shareholders' equity Total
liab. and share. equity
17
861
0
3,509
764
3,246
204
1,791
119
5,007
10,511
617
30 803 485 4,661 243 6,222
0 3,498 334 1,917 11,971 631
100 429 317 222
124
183
306 493
233
384
186
180 95 919 1,628 3,479 2,591
327 278 5,114 6,497 3,679 4,295
253
445
1,555
1,405 1,161 513 615 914
3,697
2,591 2,110
9,553
9,140
157 122
65
19
223
5
6,879
7,790
5,893
4,883
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3,771://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlr
0 153 105 54
94
77
28 20 1,837 2,273 1,469 1,624
169 97 1,504 1,308 1,031 395
366
1,648
1,565 1,663 363 580 720 124
367 350 10,583 13,867 12,465 9,987
8,078
7,012 5,901
78
100
195
92
89
132
126
0
0 536 536 609 609
32,856
609
609 367
32,377 1,794 2,694 17,600 10,077
(19,691) (16,116) (391) 2,156
135
199
992
19,237 12,518
2,568
8,553
1,609 1,461 (32,086) (32,368)
3,514 3,290 2,471
2,462 22,134 18,939 2,021
759 (838) (881) (602) (459) (364) (322) (242) 4,233
11,565
5,410 4,876 15,361
15,832
14,596 19,139 31,897 22,597
19,732
12,554 10,903
3,230 3,935 5,172
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Source: Nortel Annual Reports (1997–2003).
This document is authorized for use only by Minwen Sun in Fraud Preventin 2013 taught
by Schumann
from March
2013 to September 2013.
For the exclusive use of M. SUN
http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html
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s document is authorized for use only by Minwen Sun in Fraud Preventin 2013 taught
by Schumann
from March 2013 to September 2013.
.
)3002–7991( stropeR launnA letroN :ecruoS
For the exclusive use of M. SUN
Page 11
9B12B023
Exhibit 5
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TIMELINE OF KEY DATES IN NORTEL’S HISTORY
September, 1998 - Company changes name to Nortel Networks from Northern Telecom
underlining its shift toward data and multimedia networking from telecommunications.
May 1, 2000 - BCE Inc., Canada's biggest telecommunications group, completes spinoff
to
shareholders
of
35
per
cent
stake
abouhttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlt
in
Nortel,
CDN$88.5
worth
billion
(US$75.6 billion).
July, 2000 - Nortel shares reach a high of CDN$124.50, or more than CDN$1,100 each
if adjusted for a stock consolidation that took place in late 2006, giving it a market
cap of more than $250 billion.
October 24, 2000 - Stock drops about 20 per cent after company misses revenue target.
February 15, 2001 - Nortel cuts 2001 earnings and sales forecasts in half, blaming
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severe erosion in U.S. economic conditions. The warning triggers a 33 per cent drop
in its stock and brings class-action lawsuits.
May 29, 2002 - Nortel plans to cut 3,500 jobs and sell more assets as it pares its
revenue forecast.
June 4, 2002 - Nortel shares collapse to decade-long lows on concerns that new
financing will further dilute its stock. Cash-hungry Nortel raises $1.49 billion on
June 7.
October 23, 2003 http://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.html- Nortel
reports a quarterly profit but says it will restate results going back to 2000.
March 15, 2004 - Nortel says it will likely restate results for a second time and
delay filing its annual report.
April 5, 2004 - The U.S. Securities and Exchange Commission launches a formal
investigation into Nortel's accounting.
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January 11, 2005 - Nortel restates its results and says 12 senior executives will
repay $8.6 million of bonuses.
October 17, 2005 – Motorola’s No. 2 executive, Mike Zafirovski, is appointed CEO,
promising renewed growth and focus.
October 15, 2007 - Nortel pays $35 million to settle civil charges filed by the SEC
related to its accounting scandal.
September 17, 2008 - Nortel cuts its revenue forecast, plans another round of
restructuring and announces the sale of its Metro Ethernet Networks business.
Ihttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlt says it may also look for a
partner to develop fourth-generation wireless technology.
November 10, 2008 - Nortel announces 1,300 layoffs, a freeze on salary increases and
a review of its real-estate portfolio after posting a US$3.4 billion quarterly loss.
January 14, 2009 - Nortel files for Chapter 11 bankruptcy protection in the United
States.
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Source:
“TIMELINE:
Key
Dates
in
the
History
of
Nortel,”
Reuters,
http://www.reuters.com/article/2009/01/15/us-nortel-timeline-sb-idUSTRE50D3N1200
90115, accessed March 26, 2011.
This document is authorized for use only by Minwen Sun in Fraud Preventin 2013 taught
by Schumann
from March
2013 to September 2013.
For the exclusive use of M. SUN
Page 12
9B12B023
Exhibit 6
U.S. GAAP: BILL AND HOLD TRANSACTIONS
1.
The
risks
of
ownership
must
have
phttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlassed to the buyer;
2. The customer must have made a fixed commitment to purchase the goods, preferably
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in written documentation;
3. The buyer, not the seller, must request that the transaction be on a bill and hold
basis. The buyer must have a substantial business purpose for ordering the goods on
a bill and hold basis;
4. There must be a fixed schedule for delivery of the goods. The date for delivery
must be reasonable and must be consistent with the buyer's business purpose (e.g.,
storage periods are customary in the industry);
5. The seller must not have retained any specific performance obligations such that
the earning process is not complete;
6. The ordered goods must have been segregated from the seller's inventory and not
be subject to being used to fill other orders; and
7. The equipment [product] must be complete and ready for shipment.
Source: SEC Sthttp://doc.xuehai.net/beec01b9c4cbf4d9edd889db7.htmlaff Accounting
Bulletin:
No.
101
–
Revenue
Recognition
in
Financial
Statements;
http://www.sec.gov/interps/account/sab101.htm, accessed on July 24, 2012.
This document is authorized for use only by Minwen Sun in Fraud Preventin 2013 taught
by Schumann
from March
2013 to September 2013.
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