Alleged Accounting Fraud at Nortel Networks Corporation
(6 pages of text)
In January 2009, an investor was assessing his investment in Nortel Networks Corporation. Nortel had recently filed for bankruptcy protection in the United States and Canada, meaning his entire original investment was almost certainly lost. Nortel had filed a total of four accounting restatements from 2003 to 2007, leading to class-action lawsuits from investors and investigations by the U.S. Securities and Exchange Commission (SEC) and the Ontario Securities Commission (OSC). Considering his losses, the investor wondered whether there were any signs indicating that Nortel's accounting practices were problematic. He also wanted to understand the accounting issues raised in the SEC and OSC investigations, such as improper recognition of revenue and improper recording of provisions. Overall, the investor wanted to learn from his loss with Nortel to make stronger future investing choices.
This case is designed for use in an intermediate or advanced class in financial accounting at an undergraduate or graduate level. The case encompasses accounting issues related to revenue recognition and provisions, as well as financial reporting quality and corporate governance.The case provides enough background for a discussion of the extreme conditions brought about by the technology bubble of the late 1990s. Next, the accounting issues can lead to a discussion of the specific guidance for revenue recognition, the underlying logic for that guidance, and the manipulations perpetrated by Nortel. In addition, instructors can discuss guidance for recording provisions and how provisions can be used to manipulate income. Beyond the specific accounting issues, the case can be used to facilitate a discussion of earnings quality - specifically, defining the characteristics of high-quality earnings - and understanding the red flags that may indicate low-quality earnings. Finally, the principles of corporate governance can be discussed in the context of noted weaknesses at Nortel. Discussions can include how corporate governance relates to accounting fraud and how corporate governance was impacted by the changes brought about by the Sarbanes-Oxley Act.
Information, Media & Telecommunications
Canada, Large, 2009
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