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and income statement were much larger. Specifically, what would have been relatively minor amounts in prior periods may be considered to be
material to current periods.” As noted in the Independent Review Summary, “Nortel posted significant losses in 2001 and 2002 and downsized
its work force by nearly two-thirds. The remaining employees were asked to undertake significant additional responsibilities with no additional
increase in pay and no bonuses. The Company’s former senior corporate management asserted, at the start of the inquiry, that the Company’s
downturn, and concomitant downsizing of operations and workforce, led to a loss of documentation and a decline in financial discipline. Those
factors, in their view, were primarily responsible for the significant excess provisions on the balance sheet as at June 30, 2003, which resulted
in the First Restatement. While that downturn surely played a part in the circumstances leading to the First Restatement, the root causes ran far
deeper.” The root causes of the First Restatement, as identified in the Independent Review, are more fully discussed in the Independent Review
Summary.
The Comprehensive Review purported to (i) identify balance sheet accounts that, as at June 30, 2003, were not supportable and required
adjustment; (ii) determine whether such adjustments related to the third quarter of 2003 or prior periods; and (iii) document certain account
balances in accordance with our accounting policies and procedures. The Comprehensive Review, as supplemented by additional procedures
carried out between July 2003 and November 2003 to quantify the effects of potential adjustments in the relevant periods and review the
appropriateness of releases of certain contractual liability and other related provisions (also called accruals, reserves or accrued liabilities)in
the six fiscal quarters ending with the fiscal quarter ended June 30, 2003, formed the basis for the adjustments made to the financial statements
in the First Restatement.
On December 23, 2003, we filed with the SEC the 2002 Form 10-K/A and the 2003 Form 10-Q/As reflecting the First Restatement. As
disclosed in those reports, the net effect of the First Restatement adjustments was a reduction in accumulated deficit of $497 million,
$178 million and $31 million as at December 31, 2002, 2001 and 2000, respectively. The following were the principal adjustments of the First
Restatement:
In 2003, we, together with D&T, identified a number of deficiencies in our internal control over financial reporting.
On July 24, 2003, D&T first informed the Audit Committee that deficiencies in documentary support for certain accruals and provisions on our
balance sheet as at June 30, 2003 constituted a reportable condition, but not a material weakness, in our internal control over financial
reporting. In particular,
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• Approximately $935 million and $514 million of certain liabilities (primarily accruals and provisions) carried on our previously
reported consolidated balance sheet as at December 31, 2002 and 2001, respectively, were released to income in prior periods.
• We determined to correct certain known errors previously not recorded because the amount of the errors was not material to the
consolidated financial statements. Specifically, among other items, we made certain revenue adjustments to reflect revenue that
should have been deferred instead of recognized in a particular period.
• We made adjustments to correct errors related to deferred income tax assets and foreign currency translation accounts and made
reclassification adjustments within the consolidated balance sheet to better reflect the underlying nature of certain items. These
reclassifications did not impact our net assets as at the end of any period.
M
aterial Weaknesses and Other Deficiencies in Internal Control over Financial Reporting Identified at the Time of the First
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