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D&T concluded, in respect of this reportable condition, that it was unclear, due to the lack of documentation regarding support for certain
provisions and accruals, the passage of time and the turnover of personnel, as to what adjustments, if any, should have been made in prior
years. D&T noted that its assessment was based on such information as was available at the date of its communication to the Audit Committee
and the materiality of the underlying amounts in the context of 2003 reported results. This conclusion was initially disclosed in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.
On November 18, 2003, as part of the communications by D&T to the Audit Committee with respect to D&T’s interim audit procedures for the
year ended December 31, 2003, D&T informed the Audit Committee that there were two reportable conditions, each of which constituted a
material weakness in our internal control over financial reporting. No other reportable conditions were communicated by D&T to the Audit
Committee at the time of the First Restatement. These reportable conditions were as follows:
The foregoing material weaknesses contributed to the need for the First Restatement. Upon completion of our assessment of our internal
control over financial reporting as at December 31, 2004 pursuant to Section 404(a) of the Sarbanes-Oxley Act of 2002 and related SEC rules,
or SOX 404, we currently expect to conclude that these material weaknesses continue to exist as at December 31, 2004, and we continue to
identify, develop and begin to implement remedial measures to address them, as described below.
In late October 2003, the Audit Committee initiated the Independent Review in order to, as noted in the Independent Review Summary, “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.” As noted in the Independent Review Summary, “[t]he [Independent Review] focused initially on events
relating to the establishment and release of contractual liability and other related provisions . . . in the second half of 2002 and the first half of
2003, including the involvement of senior corporate leadership. . . . As the [Independent 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 of the
[Independent Review], the Audit Committee expanded the review to include provisioning activities in the third and fourth quarters of 2003.”
As discussed more fully above in the Independent Review Summary, the Independent Review concluded that “[i]n 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. 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
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• lack of compliance with established Nortel Networks procedures for monitoring and adjusting balances related to certain accruals
and provisions, including restructuring charges; and
• lack of compliance with established Nortel Networks procedures for appropriately applying U.S. GAAP to the initial recording of
certain liabilities, including those described in SFAS No. 5, and to foreign currency translation as described in SFAS No. 52.
Second Restatemen
t
I
ndependent Review