Nortel Case Report Essay Example for Free

Nortel Case Report EssayThe smart set also used to be affiliated with ATampT/Western Electric until Western was forced to sell its stake in 1949. In 1976, the ac party changed its name from Northern Electric to Northern Telecom Limited, and shifted its concentration on digital engine room. In 1977, Nortel introduced its DMS line of digital central office teleph genius switches. Nortel ended its long relationship with ATampT in 1984, a year after deregulation named. Bell Canada Enterprises the parent comp either to Northern Telecom. In 1998, the come with acquired Bay Networks and changed its name to Nortel Networks. In the late 90s, Nortels sales of fiber optic web gear was predicted to help their sales, except the market became saturated in truth quickly. At the height of Nortels start-off 100 years the association amassed for more than a third of the total valuation of all companies listed on the Toronto assembly line Exchange (TSX), but once the Internet bubble pass ed, the guild fell into ethical debacle. Nortel Networks Corporation, or formally known as Northern Telecom Limited was one of the largest telecommunications equipment companies in the world preceding to its filing for bankruptcy certificate onJanuary 14th, 2009. During times of functionality, they specialized in multinational telecommunications equipment manufacturing. The company is establish in Canada erupt of Mississiauga, Ontario, Canada. Their biggest rival always was Global System Mobile (GSM). Through the early 1990s, the company 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 through 2003 on that point was a full stop of fiscal irresponsibility resulting from the work of the companys administrators. Initially in 2000, they falsified their tetradth-quarter earnings b y $1 billion to lose market expectations and discriminatingly reversing certain revenue entries. In 2002, administrators disc overed $300 gazillion in excess reserves being carried over and swept it on a lower floor the rug for future win in addition to establishing another $151 million in unnecessary reserves. In 2003, administrators directed the release of at least $490 million of excess reserves to boost earning, fabricate net income, and pay bonuses.Losses turned to profits during this year thanks to the shifty methods taking place. Later in that year, administrators mis prevail investors as to why Nortel was conducting a purportedly comprehensive review of its assetsattributed by restatement $948 million in liabilities. They said restatement was caused solely by privileged control mistakes instead of the truth that there was intentional improper handling of reserves which needed to go on hidden. 2 On October 23rd, 2003, the company announced that Nortel would restate it s 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 dominance 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 misstated revenues and another $746 in liabilities. In late 2005, Nortel admitted that restatements were the result of forethought phoneybeginning the downturn of their roue.The company ended up restating financials four times over four years, replacing senior management, and instituting a comprehensives remediation program degestural to underwrite proper accounting system and reporting practices. Eventually on October 15th, 2007, Nortel agreed to settle by paying a $35 million civil penalty and admitting to violatio ns of the anti caper, reporting, books and records, and cozy control provisions of the federal securities laws. 2 On June 25th, 2009, Nortels price dropped to 18. 5 cents a share down from a high of $124. 0 in 2000. The company decided that month that they would dis cut across operations and sell off all of its business units. Nortels CDMA wireless business and LTE access technology were sold to Ericsson, and Avaya purchased Nortels Enterprise business unit. Major Players in the turd The major players in this scandal were the four members of the senior management chief executive officer stamp Dunn, CFO Douglas Beatty, controller Michael Gollogly, and assistant controller Maryanne Pahapill. CEO Frank Dunn, who is also a informed management accountant.Dunn was mainly composite in the improper use of reserves from 2000 to 2003. CFO Douglas Beatty, controller Michael Gollogly, and assistant controller Maryanne Pahapill were also regard in this management put-on. 2 The Royal Cana dian Mounted Police in Toronto arrested ex-CEO Frank Dunn, ex-CFO Douglas Beatty, and causality corporeal controller Michael Gollogly on septette counts of bilgewater. Including charges fraud affecting earth market falsification of books and documents incorrect prospectus, pertaining to allegations of criminal activity within Nortel Networks during 2002 and 2003.Magnitude of the financial issue Nortel at its peak was one of the surmount companies that Canada had ever seen. Just same(p) ENRON and other financial frauds at the time, Nortel appeared to be a shining workout of success in the corporate world. Again like ENRON, Nortel grew through a strategy of aggressive magnification and purchasing of smaller companies in order to create a massive conglomerate. During the good times Nortel was the largest technology company and the most valuable company in Canada. Nortel accounted for over one third of the entire aluation of the Toronto Stock Exchange. The Toronto Stock Exchan ge is the Canadian equivalent of the New York Stock Exchange and holds the most influential stock market in Canada. Nortel employed about 95,000 employees worldwide. About 26,000 of those workers based in Canada alone. Nortel at one channelise had a market capitalization 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 destructive a full misery of Nortel would be on the Canadian economy. The Canadian government through the Export using Canada project tried to lend money to the travel giant. However the Canadian government could not cover all of Nortels debt obligations. Nortel owed about $107 million and the EDC (Export Development Canada) could only supply about $30 million in short term loans. This $107 million fill payment accounted for about 4% of Nortels cash and entrap the company into bankruptcy.The world financial crisis of 2008 had put too much strain on Nortel and they were forced to begin liquidation. Public auditor The auditors involved with this illustration were Deloitte and Touche. In documents from the fraud case, which is still being heard by the Royal court in Canada, Deloitte claims that they were not given proper documentation by Nortel. Deloitte claims that they did not take a shit pertinent instruction 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 fraud and did their duty in that respect. 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 case states that even if transactions were deemed suspicious, they still signed off on the verity of the financial reports. Frank Dunne and some of his officers are now charged with fraud by both the sec and the OSC which regulate the American and Canadian markets respectively.The case is currently still under review in the Royal court of Canada and civil charges have been brought in the United States. Fraud trilateral Nortel had experienced 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, rear Roth, in November 2001 during the telecommunication bubble bust. Dunn felt nipd 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 first-string members of the Nortel fraud were able to pose the fraud because, as executive officers and controllers, they were able to go around the indispensable controls of the company. That allowed them to implement many accounting practices that did not comply with GAAP. Nortel managements rationalization for these fallacious practices must(prenominal) have been that they needed to maintain the high stock price in order for the company to continue in operation(p).Moral Breach and Ethical Issues As a publicly traded company, Nortel had the responsibility of fairly reporting the companys rightful(a) 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 trigger very large bonuses f or key members of management. Perhaps, if these incentives did not exist then there would be less motivation to commit 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 adjustments that Dunn and his group 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 arcsecond filed civil charges against Dunn, Beatty, Gollogly and Pahapill for repeatedly engaging in accounting fraud to bridge gaps between Nortels true performance, its internal targets, and market expectations.Dunn and Beatty were charged with violating the officer certification agreement that was established by the Sarbanes-Oxley Act. Nortel settled with SEC on October 15, 2007 by consenting to be prescribed from violating th e antifraud, reporting, books and records, and internal control provisions of the federal securities laws. Nortel salaried $35million to the SEC, and $1million to the Ontario Securities Commission to establish a Fair Fund for affected shareholders. Finally, Canadian authorities arrested and charge Dunn, Beatty and Gollogly with seven counts of fraud.Their trial began on January 16th, 2012. Current 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 trounce and easiest way to fight debt. Recently, Nortel has netted $7. 7 billion from selling its patents and businesses.As stated on their website, Nortel ashes focused on maximizing value for its stakeholders, including the sale of its remaining assets, shutdown 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 larger bonuses, is still in trial.In February, a former Vice President 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 washed-out over $20 million on retirement package these past two year, but unfortunately the company will stop the pension plan and disability pr ogram payments as it continues to sell away(predicate) 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 such 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 traffic pattern 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 professional duties in accordance with law, regulations and technical standards. 2. Provide decision information that is accurate, clear, concise and timely 3. Retain from en gaging in any conduct that would prejudice carrying out any duties ethically. 4. Abstain from engaging in or supporting any activity that might discredit the profession. 5. give out information fairly and objectively. 6.Disclose all relevant information, that could reasonably be expected to influence an mean users understanding of the reports analyses or recommendations. 7. Disclose delays or deficiencies in information timeliness processing or internal controls in conformance with organization 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 turn awayed flier a profit so the company wouldnt have to pay out bonuses. In 2003 Dunn released the reserves to senselessly report a profit, which allowed them to eports a profit a quarter earlier than expected, and to pay out more bonuses to senior management. Also in 2003 he misled the investors about why Nortel ha d 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 integrity and credibleness in the field of managerial accounting, which are two of the standards the IMA sets out. Dunn failed to meet his professional engrave of conduct and his company suffered because of it. 2. What are the responsibilities of an auditor to detect fraud?How were those responsibilities compromised by the actions of Nortels management? It is the auditors responsibility to report fraud if they find it, just in this case the actions of Nortels management made it difficult for the auditors to do their job. The false financial statements and hiding of money veiled the problems of the company from the auditors. Once there was a hint of the fraud the auditors found it and perused the trail, taking the ethical route and also following the code of conduct. It was their investigation that brought down the fraudul ent executives and forced the company to restate its financials flop.This would eventually lead to the failure of Nortel. Nortel made materially false and jerry-built statements and omissions in connection 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 brass 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 investment to both current and potential investors. In an economic climate of pictorial competition and corporate greed the management at Nortel fell vi ctim to their vices and allowed the pressure to perform to inter 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 governance 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 characterizes Nortels failure as just another misfortune of capitalism. Do you agree with this statement? Why or why not? How would you characterize the cause of the failure at Nortel? I would argue that Nortel is not just another cas ualty 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 effect 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, heart and soul there is no room to commit fraud and damage the company.In this way you are put 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 compel 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 fraud. Groups that may have been hurt could be shareholders, employees and customers.Deciding what is a fair comp ensation 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 sentence of termination from their company, loss of license (if applicable) and jail time. The company and the man-to-man 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.