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In late October 2003, Nortel Networks Corporation (“Nortel” or the “Company”) announced that it intended to restate approximately $900M of
liabilities carried on its previously reported balance sheet as of June 30, 2003, following a comprehensive internal review of these liabilities
(“First Restatement”). The Company stated that the principal effects of the restatement would be a reduction in previously reported net losses
for 2000, 2001, and 2002 and an increase in shareholders’ equity and net assets previously reported on its balance sheet. Concurrent with this
announcement, the Audit Committees of the Boards of Directors of Nortel Networks Corporation and Nortel Networks Limited (collectively,
the “Audit Committee” and the “Board of Directors” or “Board,” respectively) initiated an independent review of the facts and circumstances
leading to the First Restatement. The Audit Committee wanted to gain a full understanding of the events that caused significant excess
liabilities to be maintained on the balance sheet that needed to be restated, and to recommend that the Board of Directors adopt, and direct
management to implement, necessary remedial measures to address personnel, controls, compliance, and discipline. The Audit Committee
engaged Wilmer Cutler Pickering Hale and Dorr LLP (“WCPHD”) to advise it in connection with its independent review. Because of the
significant accounting issues involved in the inquiry, WCPHD retained Huron Consulting Services LLC (“Huron”) to provide expert
accounting assistance. Huron has been involved in all phases of WCPHD’s work.
The independent review focused initially on events relating to the establishment and release of contractual liability and other related provisions
(also called accruals, reserves, or accrued liabilities) in the second half of 2002 and the first half of 2003, including the involvement of senior
corporate leadership. (The review did not include provisioning activity in the first half of 2002 because it was not expected that any such
activity could have had a material impact on the results of those quarters in light of the significant losses in those periods.) As the review
evolved, its focus broadened to include specific provisioning activities in each of the business units and geographic regions. In light of
concerns raised in the initial phase, the Audit Committee expanded the review to include provisioning activities in the third and fourth quarters
of 2003.
The Audit Committee expressly directed that requested documents be promptly provided and that employees cooperate with requests for
interviews; the Audit Committee instructed senior management to implement these directions throughout the Company. Over the course of the
inquiry, more than 50 current and former Nortel employees were interviewed, some more than once. While the independent inquiry did not
examine the work of Nortel’s external auditor, Deloitte & Touche LLP, several current and former audit engagement partners were
interviewed. Hundreds of thousands of hard copy and electronic documents and emails were collected and reviewed from corporate
headquarters in Brampton, from company servers, and from key employees in the business units and in the regions.
It was beyond the scope of the independent inquiry to audit or otherwise review the substantive accuracy of Nortel’s restated financial
statements. As the inquiry progressed, the Audit Committee directed new corporate management to examine in depth the concerns identified by
WCPHD regarding provisioning activity and to review provision releases in each of the four quarters of 2003, down to a low threshold. That
examination, and other errors identified by management, led to a second restatement of financial results, filed today (the “Second
Restatement”). WCPHD and Huron played no role in management’s restatement efforts. It was also beyond the scope of the independent
inquiry to review other aspects of Nortel’s accounting practices. The Second Restatement addresses a number of these practices.
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