Nortel Case Report Essay

The troupe to a fault used to be affiliated with AT&T/Western galvanizing until Western was forced to puzzle out out its stake in 1949. In 1976, the family changed its name from Northern Electric to Northern Telecom particular, and shifted its concentration on digital technology. In 1977, Nortel introduced its DMS grade of digital central office telephone switches. Nortel ended its long affinity with AT&T in 1984, a year later on(prenominal) de linguistic rule named. Bell Canada Enterprises the parent com movey to Northern Telecom. In 1998, the smart set acquired Bay Networks and changed its name to Nortel Networks.In the late 90s, Nortels gross sales events of fiber optic network gear was predicted to help their sales, but the commercialize became saturated very quickly. At the height of Nortels first snow years the corporation amassed for more(prenominal) than a third of the total evaluation of every companies listed on the Toronto Stock re-sentencing (TSX) , but once the get aheads bubble passed, the family fell into ethical debacle. Nortel Networks Corporation, or form altogethery cognise as Northern Telecom Limited was one of the largest telecommunications equipment companies in the humanityness prior to its filing for unsuccessful person breastplate onJanuary 14th, 2009. During measure of functionality, they vary in multinational telecommunications equipment manufacturing. The comp any is base in Canada out of Mississiauga, Ontario, Canada. Their biggest advert al divvy upments was Global System Mobile (GSM). Through the early 1990s, the society invested heavily in Code Division Multiple Access (CDMA) in attempt to grow in European and Asian markets. This did non pan out so well as Nortels losses amounted to $27. 3 billion by 2001causing them to lay off two-thirds of the workforce.From 2000 done 2003 on that point was a period of fiscal irresponsibility resulting from the work of the companys administrators. Initia lly in 2000, they falsified their four-spotth-quarter earnings by $1 billion to roleplay market expectations and selectively reversing certain revenue entries. In 2002, administrators dis palmed $ three hundred one gazillion million in excess reserves being carried everyplace and move it under the rug for future benefit in plus to establishing other $151 million in unnecessary reserves. In 2003, administrators directed the release of at least $490 million of excess reserves to boost earning, fabricate internet, and ease up bonuses.Losses turned to profits during this year thanks to the shifty methods pickings place. Later in that year, administrators mis overtake investors as to why Nortel was conducting a purportedly comprehensive review of its assetsattributed by re bid $948 million in liabilities. They said restatement was caused only if by sexual control mistakes instead of the truth that there was wise to(p) improper handling of reserves which needed to remain h idden. 2 On October 23rd, 2003, the company announced that Nortel would restate its financials for fiscal years 2000, 2001, and 2002.Shortly after this restatement, the major players of Nortels administration that were responsible for all of this were exposed through an independent probe. In March 2004, The chief financial officer and controller were suspended, in addition to the announcement of further restatements and revisions they were terminated a month later in April 2004. A restatement in early 2005 showed approximately $3. 4 billion in mis tell revenues and another $746 in liabilities. In late 2005, Nortel admitted that restatements were the result of anxiety mockerybeginning the come outturn of their stock.The company ended up restating financials four convictions over four years, replacing senior counselling, and instituting a comprehensives remediation weapons platform designed to ensure proper accounting and reporting practices. Eventually on October 15th, 2007, Nortel agreed to settle by paying a $35 million polite penalty and admitting to violations of the anti snake oil, reporting, books and records, and internal control provisions of the national securities laws. 2 On June 25th, 2009, Nortels price dropped to 18. 5 cents a share down from a high gear of $124. 0 in 2000. The company decided that month that they would discontinue operations and sell off all of its transaction units. Nortels CDMA wireless business and LTE access technology were sold to Ericsson, and Avaya purchased Nortels Enterprise business unit. Major Players in the Scandal The major players in this scandal were the four members of the senior management CEO cad Dunn, CFO Douglas Beatty, controller Michael Gollogly, and companion controller Maryanne Pahapill. CEO Frank Dunn, who is also a certified management accountant.Dunn was mainly involved in the improper use of reserves from 2000 to 2003. CFO Douglas Beatty, controller Michael Gollogly, and assistant control ler Maryanne Pahapill were also involved in this management faker. 2 The olympian Canadian Mounted Police in Toronto arrested ex-CEO Frank Dunn, ex-CFO Douglas Beatty, and former corporate controller Michael Gollogly on seven counts of pretender. Including charges sham touch on public market falsification of books and documents false prospectus, pertaining to allegations of criminal activity indoors Nortel Networks during 2002 and 2003.Magnitude of the financial issue Nortel at its peak was one of the stovepipe companies that Canada had ever seen. Just like ENRON and other financial frauds at the time, Nortel appeared to be a shining example of success in the corporate world. once again like ENRON, Nortel grew through a strategy of aggressive intricacy and acquire of smaller companies in order to create a massive conglomerate. During the unspoilt times Nortel was the largest technology company and the most valu up to(p) company in Canada. Nortel accounted for over one thi rd of the entire aluation of the Toronto Stock Exchange. The Toronto Stock Exchange is the Canadian equivalent of the New York Stock Exchange and holds the most powerful stock market in Canada. Nortel employed to the highest degree 95,000 employees worldwide. About 26,000 of those workers based in Canada alone. Nortel at one point had a market capitalisation of almost C$400 billion. Nortel had set up pensions and healthcare protection for its employees. All of these were lost to either the restructuring under Frank Dunne which left about 60,000 employees without jobs or the bankruptcy that followed in 2009.Canadian government officials and regulators identified how perverting a full failure of Nortel would be on the Canadian economy. The Canadian government through the Export Development Canada project tried to tally money to the falling giant. However the Canadian government could not cover all of Nortels debt obligations. Nortel owed about $107 million and the EDC (Export Deve lopment Canada) could only confer about $30 million in short term loans. This $107 million interest payment accounted for about 4% of Nortels change and border the company into bankruptcy.The world financial crisis of 2008 had put too much logical argument on Nortel and they were forced to begin liquidation. Public auditor The auditors involved with this plate were Deloitte and Touche. In documents from the fraud fictional character, which is still being heard by the Royal speak to in Canada, Deloitte claims that they were not given proper documentation by Nortel. Deloitte claims that they did not boast pertinent info which should have been provided by administrators at Nortel. Deloitte raised concerns to the audit board of Nortel in 2003 when Nortel turned a profit after Frank Dunnes restructuring of the company.Deloitte raised awareness of potential difference fraud and did their duty in that revere. However further investigation conducted has implicated Deloitte in the financial reporting irregularities in Nortel which some have claimed dates back to the time of CEO Roth who held office before Dunne. Information coming out of the discipline states that even if transactions were deemed suspicious, they still signed off on the ingenuousness of the financial reports. Frank Dunne and some of his officers are now aerated with fraud by both the SEC and the OSC which regulate the the Statesn and Canadian markets respectively.The result is rate of flowly still under review in the Royal court of Canada and civil charges have been brought in the United States. Fraud Triangle Nortel had undergo tremendous growth throughout the 1990s, allowing it to expand operations worldwide. Nortels expansion came during the telecommunication and technology bubble of the 1990s that inflated stock prices of companies in those sectors. Frank Dunn had taken over for the previous CEO, John Roth, in November 2001 during the telecommunication bubble bust. Dunn felt printi ng pressd to maintain the high stock price because it accounted for over one third of Nortels value2.Nortel management was also incentivized to post profits that produced executive bonuses with over $7. 8million going to Dunn alone. The primary members of the Nortel fraud were able to draw in the fraud because, as executive officers and controllers, they were able to go around the internal controls of the company. That allowed them to implement many accounting practices that did not comply with GAAP. Nortel managements rationalization for these fraudulent practices must have been that they needed to maintain the high stock price in order for the company to continue operating. lesson Breach and Ethical Issues As a publicly traded company, Nortel had the responsibility of fair reporting the companys true financial data to stockholders and potential investors. Dunn, Beatty, Gollogly and Pahapill breached this responsibility by establishing earnings management accounting strategies to manipulate Nortels revenues. Nortel management also actively sought to inflate earnings to trip up very large bonuses for key members of management. Perhaps, if these incentives did not exist then there would be less motivation to use the fraud.Finally, Nortels auditor for over a century, Deloitte and Touche, has come under scrutiny by the defense lawyers in Dunn, Gollogly and Beattys civil trial in Canada this year. The defense claims that Deloitte approved of all major accounting ad sightlyments that Dunn and his team had engaged in. Summary of Legal Actions On April 28th, 2004, Dunn and his fraud partners were fired for financial mismanagement2. On March 12th, 2007 the SEC filed civil charges against Dunn, Beatty, Gollogly and Pahapill for repeatedly engaging in accounting fraud to bridge gaps mingled with Nortels true performance, its internal targets, and market expectations.Dunn and Beatty were charged with violating the officer assay-mark agreement that was established b y the Sarbanes-Oxley Act. Nortel settled with SEC on October 15, 2007 by consenting to be prescribed from violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws. Nortel paid $35million to the SEC, and $1million to the Ontario Securities Commission to establish a Fair Fund for alter shareholders. Finally, Canadian authorities arrested and charge Dunn, Beatty and Gollogly with seven counts of fraud.Their trial began on January 16th, 2012. modern Status Nortel, once known as the largest telecommunications manufacturer in the world, filed for bankruptcy in 2009. Now three years later, the period of bankruptcy continues as the company discloses their every operating report highlighting each cash receipt and disbursement. When Nortel went bankrupt, executives believed that selling all business assets would be the best and easiest way to fight debt. Recently, Nortel has netted $7. 7 billion from selling its patents and busine sses.As stated on their website, Nortel remains focused on maximizing value for its stakeholders, including the sale of its remaining assets, resolution of claims, the wind-down of its global operations and entities, resolution of allocation matters with respect to the sale proceeds, and other significant restructuring activities toward the conclusion of the creditor protection proceedings. The case for Nortel executives Dunn (ex CEO), Beatty (ex CFO) and Gollogy (ex controller), who were charged with fraud for affecting the public market and falsifying books and documents to earn large bonuses, is still in trial.In February, a former Vice professorship of Nortel testified in court against executives stating that they had asked him to use questionable accounting methods to manipulate the companys earnings. Although those who committed the crime have been charged, thousands of employees will still be left without pension plans and jobs. Nortel has spent over $20 million on retirem ent package these past two year, but unfortunately the company will stop the pension plan and disability program payments as it continues to sell away its businesses.By the end of 2011, Nortel was split into regional entities Nortel Networks Limited in Canada and Nortel Networks Inc in the United States, causing disagreements over how to split $7. 5 billion that was earned by selling many assets and patents other corporations much(prenominal) as Apple and Microsoft Corp. The following charts, graphs and financial statements analyze Nortels current status. Case Study Questions and Solutions 1. Dunn is a certified management accountant. Based on the facts of the case, which provisions of the IMAs Statement of Ethical Professional Practice that was discussed in chapter 1 have been violated?Dunn violates many of the provisions of the IMAs statement of Ethical Professional Practice they are as follows 1. Perform master key duties in accordance with law, regulations and technical stand ards. 2. Provide decision information that is accurate, clear, elliptic and timely 3. Retain from engaging in any conduct that would mischief carrying out any duties ethically. 4. Abstain from engaging in or keep any activity that might discredit the profession. 5. Communicate information clean and objectively. 6.Disclose all relevant information, that could reasonably be expected to mould an intended users understanding of the reports analyses or recommendations. 7. Disclose delays or deficiencies in information timeliness processing or internal controls in conformance with presidential term policy and/or applicable law. He violated these by selective reversal of revenue entries in 2000. Followed by concealing the reserves in 2002, which violated GAAP, and then avoided posting a profit so the company wouldnt have to pay out bonuses. In 2003 Dunn released the reserves to wrong report a profit, which allowed them to eports a profit a quarter introductory than expected, and to pay out more bonuses to senior management. Also in 2003 he misled the investors about why Nortel had restated its financials in order to avoid uncovering the unethical management techniques him and his team had been using. All of these actions take away Dunns right and credibility in the field of managerial accounting, which are two of the standards the IMA sets out. Dunn failed to stick out his professional code of conduct and his company suffered because of it. 2. What are the responsibilities of an auditor to feel fraud?How were those responsibilities compromised by the actions of Nortels management? It is the auditors responsibility to report fraud if they find it, besides in this case the actions of Nortels management make it difficult for the auditors to do their job. The false financial statements and hiding of money conceal the problems of the company from the auditors. Once there was a hint of the fraud the auditors represent it and perused the trail, taking the ethi cal route and also following the code of conduct. It was their investigation that brought down the fraudulent executives and forced the company to restate its financials properly.This would eventually lead to the failure of Nortel. Nortel made materially false and misleading statements and omissions in confederacy with the quarterly reviews and materially misstated annual audits of financial statements. This caused the auditors to not be able to properly do their job, and review the statements. 3. Describe the incentives that created pressure on Nortel to manage earnings. Considering the role of Nortels management in this regard, discuss whether it met its corporate organisation obligations as discussed in previous chapters.The incentives that drove Nortel to manage its earning where greed of the management team, the pressure to deliver bonuses, the pressure to survive an economic downturn, and the pressure to make the company seem like a good enthronization to both current and potential investors. In an economic climate of intense pipe dream and corporate greed the management at Nortel fell victim to their vices and allowed the pressure to perform to overwhelm their priorities. This caused them to put their own greed and personal ambition before the well being of the company. Nortel did not meet its corporate institution obligations.It did not follow any internal rules of how to run the business. It ignored any corporate ethics they might have. It lied to stakeholders several times by misstating the financials. They did not follow the professional code of conduct of their careers and also did not follow industry standards. They broke the law. No one inside the company caught the fraud therefore their internal controls where not effective. Each of these immoral acts is a case where corporate governance has failed. 4. The final quote in the case disposes Nortels failure as just another casualty of capitalism. Do you agree with this statement? Why or why not? How would you think of the cause of the failure at Nortel? I would argue that Nortel is not just another casualty of capitalism. Nortel did not function in a system of free market capitalism where the government had absolutely no regulation and let the markets function however they wanted. The capitalism system of North America is more of a mixed economy, which combines public and private ownership of companies, and also provides government regulation and intervention to prevent and deal with fraud.Even in a free market the system is meant to come to an equal balance of supply and demand, which cannot be reached if there is fraud involved since the supply has been inaccurately disclosed by the senior management at Nortel. I would characterize this failure as one of humanity. It was not the economic system that allowed this fraud to take place, but the greed of the people and a social environment that ties success so strongly to wealth. It was the social pressure and the eff ect of human nature that led to Nortels demise. . The case discusses how Nortels managers prioritized themselves over the shareholders, which, in part, lead to the companys failure. What should be a companys first priority? A companys first priority should be following their code of ethics. The second priority should be the shareholders, followed by the management and other employees. This hierarchy ensures that all the business that is done with be both moral and legal, meaning there is no room to commit fraud and damage the company.In this way you are putting the shareholders first, because by providing a stable and healthy company the shareholders will see an investment that will be able to reach its highest potential. 6. Was Nortels settlement a fair penalty? Should the SEC have imposed harsher or more lenient sanctions? Should these sanctions have been on the managers, on Nortel as a whole, or both? A fair settlement would offer compensation to all those who were hurt by this f raud. Groups that may have been hurt could be shareholders, employees and customers. decision making what is a fair compensation is a little more difficult, however as much of what these people lost as possible should be returned to them. As for the managers who created the problems and took part in the fraud should face a designate of termination from their company, loss of license (if applicable) and jail time. The company and the individual managers have both failed stakeholders and should both be held accountable. In the case of Nortel specifically the stockholder settlement goes with these guidelines, as for the managers their trial is still ongoing and therefore no sentenced has been given to them yet.