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Upon completion of management’s assessment of our internal control over financial reporting as at December 31, 2004 pursuant to SOX 404,
we currently expect to conclude that the first five of these six Material Weaknesses continue to exist at December 31, 2004. We continue to
identify, develop and begin to implement remedial measures to address them, as described in the ”Controls and Procedures“ section of this
report. See also notes 3 and 23 to the accompanying consolidated financial statements.
Over the course of the Second Restatement process, management identified certain accounting practices that it determined should be adjusted
as part of the Second Restatement. In particular, management identified certain errors related to revenue recognition and undertook a process of
revenue reviews. In light of the resulting adjustments to revenues previously reported, the Audit Committee has determined to review the facts
and circumstances leading to the restatement of these revenues for specific transactions identified in the Second Restatement. The review will
have a particular emphasis on the underlying conduct that led to the initial recognition of these revenues. The Audit Committee will seek a full
understanding of the historic events that required the revenues for these specific transactions to be restated and will consider any appropriate
additional remedial measures, including those involving internal controls and processes. The Audit Committee has engaged WCPHD to advise
it in connection with this review.
In connection with the Independent Review, we have, among other actions, terminated for cause:
Each of these former members of management had responsibility for their respective positions at the time of the Comprehensive Review and
First Restatement. The Board of Directors determined that each of these individuals had significant responsibilities for our financial reporting
as a whole, or for their respective business units and geographic regions, and that each was aware, or ought to have been aware, that our
provisioning activity, described above, did not comply with U.S. GAAP.
The delayed filing of the Reports with the SEC, the trustees under our and NNL’s public debt indentures and Export Development Canada, or
EDC, gave EDC the right to (i) terminate its commitments under the $750 EDC support facility, or the EDC Support Facility, relating to
certain of our performance related obligations arising out of normal course business activities and (ii) exercise certain rights against the
collateral pledged under related security agreements or require NNL to cash collateralize all existing support. NNL has obtained waivers from
EDC with respect to these and related matters to permit continued access to the EDC Support Facility in accordance with its terms while we
complete our filing obligations with respect to the Reports. The waivers have also applied to certain additional breaches under the EDC
Support Facility relating to the delayed filings and the restatements and revisions to our and NNL’s prior financial results, or the Related
Breaches. In connection with such waivers, EDC reclassified the previously committed $300 revolving small bond sub-facility of the EDC
Support Facility as uncommitted support during the waiver period. The $300 revolving small bond facility will not become committed support
until all of the Reports have been filed with the SEC and NNL obtains a permanent waiver of the Related Breaches.
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• lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and
documentation of the application of U.S. GAAP to transactions, including but not limited to revenue transactions;
• lack of a clear organization and accountability structure within the accounting function, including insufficient review and
supervision, combined with financial reporting systems that are not integrated and which require extensive manual interventions;
• lack of sufficient awareness of, and timely and appropriate remediation of, internal control issues by Nortel Networks personnel;
and
• an inappropriate ‘tone at the top’, which contributed to the lack of a strong control environment; as reported in the Independent
Review Summary set forth in the “Controls and Procedures” section of this report, there was a 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”.
Revenue Inde
p
endent Review
Personnel actions
• our former president and chief executive officer, former chief financial officer and former controller in April 2004 (the former chief
financial officer and former controller having been placed on paid leaves of absence in March 2004) and
• seven additional senior finance employees with significant responsibilities for our financial reporting as a whole or for their
respective business units and geographic regions in August 2004.
EDC Su
pp
ort Facilit
y