NORTEL: IMPLICATION OF UNETHICAL ACTS

Doucet (June, 2010)

Nortel: Implication of Unethical Acts

Making ethical decisions in accounting is growing in complexity because of the larger number of stakeholders in business, and the greater responsibility on accountants. In the early 2000s many financial and accounting scandals went public in the media. As a result the practice of accounting in recent years has evolved drastically and greater accountability and consequences have been issued to corporations. In the United States authorities made many headlines with companies who practiced fraudulent activities, such as Nortel, to serve as a warning to those who dare brake rules in the future.

Accusations

In 2007, the SEC issued a press release that noted the charges they laid to four former senior executives of Nortel Networks Corporation for their role in supporting financial fraud. The executives were accused of numerous fraudulent acts in using accounting fraud to bridge the gap between the company’s true performance with its internal goals and the expectations of the public (SEC, 2007).

Unethical behavior

As outlined in the press release, the unethical behavior that was displayed by senior executives had misled the public, and caused billions of dollars in losses to Nortel investors and shareholders. The issue gives rise to the complexity of stakeholders involved in accounting. Ultimately, it was the pressure from Wall Street and the public’s expectation of Nortel’s growth that led to initial discrepancies, later the large payouts to senior members and the greed of Nortel’s executives served as justification to mislead investors. In the end, those with most at stake, small investors and shareholders, incurred the biggest loss.

According to the SEC’s complaint, senior executives of Nortel engaged in a number of illegal and unethical practices. The executives altered Nortel’s revenue numbers, by breaching revenue recognition policies, improperly established and released reserves to meet earnings targets and fabricated profits altogether to payout greater performance-related bonuses.

Breaching accounting standards

One of the most troubling facts of the case is that Nortel’s executives specifically ignored and violated protocols established by United States GAAP to pull forward expected revenue to meet public expected revenue targets. As stipulated by law, all companies whose shares are listed in a public exchange must follow accounting guidelines as established by GAAP (Young, etal, 2007).

Conceptual framework: relevance and reliability

Other implications that arise from not following the accounting standards established from GAAP rest in the conceptual framework underlying financial reporting. Relevance and reliability are two important subtopics in the subject matter. “Accounting information is reliable to the extent that it is verifiable, is a faithful representation of the underlying economic reality, and is reasonably free of error and bias” (Young etal, 2007, p. 38). What is important to consider in this case is that reliability of information is especially important for individuals who do not have the sophistication, or expertise of verifying if the information contained in the company’s financial statements are factual. Most of the investors and shareholders of Nortel fit into this category and this was the major reason the public incurred the greatest losses.

Loss of neutrality

Senior executives of Nortel manipulated relevant accounting material in such a way that it influenced shareholders and investors in poor decisions. Although the information the company was feeding the public allowed individuals to make predictions about the financial outcome of past, present, and future events; the predictions were false as the information was also false. The information was manipulated in such a way that it lost its neutrality. The information favored senior management to general shareholders. Christopher Conte, member of SEC in relation to the allegations of the senior members of Nortel said: “ These defendants all received significant compensation, in some cases in the millions of dollars, while they were manipulating Nortel’s financial results. In some cases, these individuals received such compensation only because they manipulated Nortel’s financial results” (SEC, 2007, Para 4).

Consequences and charges

The charges against the former chief executives of Nortel will lead to “permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants” (SEC, 2007, Para 10).

Conclusion

In light of the recent and many cases of fraudulent acts in financial reporting and accounting, ethics is becoming an important concern. The SEC hopes the consequences it lays on companies who have betrayed the trust of the public, such as Nortel, will be enough to create a widespread reform of accounting practices in the country.

References

SEC (2007). SEC charges four former senior executives of Nortel Networks

Corporation in wide ranging financial fraud scheme. Retrieved on June 3^rd, 2010

from: http://www.sec.gov/news/press/2007/2007-39.htm

Young, N.M, Warfield, T.D., Weygandt, J.J., Wiecek, I.M., & Kieso, D.E. (2007).

Intermediate accounting (8^th ed.). Ontario, Canada: Wiley & Sons Ltd.