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WCPHD and Huron reported regularly to the Audit Committee on the progress of the investigation. Most, or all, of the independent and non-
management Board members attended these Audit Committee briefings. The Chairs of the Audit Committee and of the Board of Directors
were briefed between Audit Committee meetings to provide them with a “real time” understanding of the progress of the investigation. At the
direction of the Audit Committee, WCPHD and Huron met regularly with new management and the Company’s external auditors to provide
facts developed through the inquiry, so both would have this information as they proceeded through the Second Restatement. WCPHD and
Huron also briefed Canadian and U.S. regulators on a regular basis. The Audit Committee has reviewed in detail the findings of the
independent review and the recommended remedial measures, and it has adopted those findings and proposed remedial measures in their
entirety. This synopsis summarizes those findings and proposed remedial measures.
The investigation necessarily focused on the financial picture of the Company at the time that decisions were made and actions were taken
regarding provisioning activity. Because of significant changes to financial results reflected in the Second Restatement, the restated financial
results differ from the historical results that formed the backdrop for this inquiry.
In summary, former corporate management (now terminated for cause) and former finance management (now terminated for cause) in the
Company’s finance organization endorsed, and employees carried out, accounting practices relating to the recording and release of provisions
that were not in compliance with U.S. generally accepted accounting principles (“U.S. GAAP”) in at least four quarters, including the third and
fourth quarters of 2002 and the first and second quarters of 2003. In three of those four quarters — when Nortel was at, or close to, break even
— these practices were undertaken to meet internally imposed pro-forma earnings before taxes (“EBT”) targets. While the dollar value of most
of the individual provisions was relatively small, the aggregate value of the provisions made the difference between a profit and a reported loss,
on a pro forma basis, in the fourth quarter of 2002 and the difference between a loss and a reported profit, on a pro forma basis, in the first and
second quarters of 2003. This conduct caused Nortel to report a loss in the fourth quarter of 2002 and to pay no employee bonuses, and to
achieve and maintain profitability in the first and second quarters of 2003, which, in turn, caused it to pay bonuses to all Nortel employees and
significant bonuses to senior management under bonus plans tied to a pro forma profitability metric.
The failure to follow U.S. GAAP with respect to provisioning can be understood in light of the management, organizational structure, and
internal controls that characterized Nortel’s finance organization. These characteristics, discussed below, include:
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• Management “tone at the top” that 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 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 that led to a lack of transparency regarding provisioning
activity to achieve internal EBT targets.