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The Board of Directors must make clear that it has not tolerated, and will not in the future tolerate, accounting conduct that involves the
misapplication of U.S. GAAP. It must further communicate its expectation that every Nortel employee will adhere to the highest ethical
standards; will have training and experience commensurate with his or her job responsibilities; and will be held accountable for his or her
actions and decisions. The Board of Directors and management should continue to address the issues associated with the inappropriate use of
provisions.
Recent experience has shown that the Nortel finance organization lacks sufficient technical accounting expertise. Many finance employees are
“career” Nortel employees and learned accounting at Nortel. Whatever basic accounting knowledge is resident within Nortel is largely
knowledge of Canadian GAAP, not U.S. GAAP. Nortel reported in accordance with Canadian GAAP until 2000, when it switched to reporting
in accordance with U.S. GAAP. High quality finance employees are critical to the soundness of the Company’s financial reporting systems and
controls so that the results of operations are reported accurately and in a timely manner. The Board of Directors should direct management to
recruit, from outside Nortel, individuals with strong accounting and financial reporting skills and a proven record of integrity and ethical
behavior to fill key finance positions. The Board should also direct management to review the training and experience of Nortel mid-level
finance employees and to supplement this expertise, where appropriate, by hiring individuals from outside Nortel with strong accounting
training and background.
Nortel has long had an internal “technical accounting group” to which finance employees were supposed to turn for resolution of difficult
accounting questions and for technical accounting interpretations. While this practice is a sound one, the practical application has fallen short.
Finance employees did not regularly turn to this group for resolution of an issue, and it was far from clear that this group had the “last word”
on such issues. That technical accounting group should be led by a very senior finance executive with in-depth knowledge of, and experience
in applying, U.S. GAAP. Management should be directed to conduct a benchmarking study to evaluate whether the technical accounting group
is properly organized; its personnel component is consistent with other similar companies; its staff has appropriate and current expertise; and
its authority to resolve accounting issues and technical interpretations is clearly defined within the organization.
Notwithstanding the enormous time and resources that the Company has devoted to restatement activities for the past year, many employees
appear to lack a clear understanding of the accounting issues that gave rise to the restatements. That is perhaps not surprising in light of the
lack of basic U.S. GAAP training and expertise in the finance organization. Management has taken significant steps to remedy this deficit by
requiring mandatory training, developed by external consultants, and taught by knowledgeable finance employees. These remedial training
programs are an important first step, but much more must be done to ensure that the finance organization is fluent in governing accounting
standards and principles. Widespread training, by outside experts, at all levels of the finance organization, must continue so that all finance
employees receive comprehensive training in U.S. GAAP and in the consequences of failing to follow U.S. GAAP. Going forward,
management should develop in depth, on-going continuing education programs that explain continuously evolving complex accounting
standards. Management should assess the staffing of its training organization, and the adequacy of its trainers. Every Nortel employee,
including each finance employee, must now acknowledge annually, in writing, that he or she has read Nortel’s code of conduct and will adhere
to that code. The certification for each finance employee should be expanded to include an acknowledgement that each such employee is
familiar with all applicable U.S. GAAP requirements. In addition, the Board should consider whether each finance employee should be
required to complete a certain number of hours of continuing professional education each year.
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