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Nortel heads into Sarbanes-Oxley headwind

Nortel heads into Sarbanes-Oxley headwind

by Rick Turoczy on January 14, 2005

Former Nortel Networks chief executive Frank Dunn and his financial executives are alleged to have manipulated their company’s accounts — only a few months after the passage in mid-2002 of the Sarbanes-Oxley bill in the U.S. This is the landmark legislation that compels chief executives to certify their company’s accounts are accurate or risk substantial penalties.

Nortel was obviously aware of the bill’s significance — in the summer of 2002 it established a management “disclosure” committee of eight or so top executives. The group met on a near-weekly basis for a time to establish appropriate responses to a multitude of new governance rules that have recently come into effect.

Among the legislation’s goals was to improve the “tone at the top” of publicly-traded companies. Since Dunn was a key member of the disclosure committee, his alleged behaviour is all the more puzzling.

Nortel reported on Tuesday that Dunn and members of his finance team had used inappropriate accounting manoeuvres to transform money-losing quarters into profitable ones early in 2003. Why would Dunn and his colleagues have left themselves so open to charges of breaching accounting rules at the dawn of the Sarbanes-Oxley era?

So far, all we have to go on are this week’s extensive filings by Nortel and the report of the independent review it commissioned from the Washington law firm Wilmer Cutler. It’s a detailed account, but it’s still only one side of the story. Nevertheless, the report of the review does contain tantalizing clues about how the finance group got snared in such a multi-faceted probe.

Nortel heads into Sarbanes-Oxley headwind

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