Former executives of Nortel Networks operated a "cookie jar" of funds used to tailor the network equipment maker's profits and losses so they could qualify for "lucrative" cash and stock bonuses, a prosecutor has alleged.
Crown attorney Robert Hubbard made the accusation Monday as the fraud trial against former Nortel CEO Frank Dunn, CFO Douglas Beatty and controller Michael Gollogly opened.
The trio pleaded not guilty to two counts of fraud committed in Canada and the U.S. between Jan. 1, 2002 and April, 2004 before a standing-room courtroom filled with reporters and former Nortel shareholders and employees.
Nortel filed for bankruptcy protection in January 2009, after a string of losses and restatement of finances that stretched back to 2000. Today it has sold off almost all of its assets.
Dunn, Beatty and Gollogly were dismissed for cause by Nortel in 2004.
In some cases the funds were used to turn what would have been a pro forma (or unaudited) profit into a loss, Hubbard said, to meet the terms of the bonus plan.
The funds were accrued liabilities, certain items (such as possible earnings from a lawsuit) that have to be allocated to a corporate balance sheet as a cost or expense under Generally Accepted Accounting Principles (GAAP).
GAAP rules are firm, Hubbard said he will show, in how these accruals are to be calculated and recorded. In fact, he called them "accounting 101."
The accused, he stressed, are accountants. "They understood accounting 101," he said. They also understood, he added, that Nortel's profitability could only be achieved through the improper release of hundreds of millions of dollars on the company's quarterly financials.
In particular, Hubbard said, he will show that some $216 million of $731 million in accruals in 2003 put on the books were in excess of what GAAP allows.
As he said in a pre-trial hearing last week, Hubbard acknowledged that the accused didn't create the accrual pool scheme, but during the period of the charges "they're the ones controlling it."
"This case is not about accounting," the prosecutor said, but the deliberate misrepresentation of the financial documents of Nortel.
Hubbard, who will continue his opening statement on Tuesday, will call 28 witnesses, including former chair of the Nortel audit committee John Cleghorn.
Most of them, however, will be people who worked on Nortel's books. Some of these witnesses "could be accomplices" to the alleged fraud, Hubbard warned Justice Frank Marrocco. But, he added, that doesn't undermine the responsibilities of the accused.
Much of the trial is expected to concern how Nortel and its auditors applied GAAP accounting rules for the compilation of quarterly financial statements. The defence signaled last week at a pre-trial hearing that it will argue the rules have some elasticity.
Sign up for CIO Asia eNewsletters.