Nortel Hit Hard by Accounting Concerns

Nortel Networks said it has suspended its two top financial executives pending the outcome of an internal audit, sparking fear that the telecommunications equipment maker could become the latest tech firm ravaged by accounting scandal.

Shares of Nortel, which had been climbing to new heights as the company began to see the effects of a resurgence in enterprise and telecom spending, tumbled nearly 20 percent on Wall Street after the company said it would delay the filing of an amended earnings report until the probe has run its course.

Toronto, Canada-based Nortel said it has made temporary appointments to the positions of chief financial officer and controller. The executives formerly in those roles, CFO Douglas Beatty and controller Michael Gollogly, were placed on paid leaves of absence.

At issue are the circumstances leading to the restatement of Nortel’s results in the early part of 2003. Nortel acknowledged it may have to restate all of its 2003 earnings and “restate previously filed financial results for one or more earlier periods.” Nortel said last October that it was reviewing results from as far back as 2000, when the telecom slump first hit.

Jumping to Conclusions

Investors scurried to divest themselves of shares of the network and telecom equipment maker in the wake of the news Monday, sending Nortel stock down 18 percent to US$5.24 per share. The stock slipped further in early trading Tuesday, losing another 6 percent and dipping below the $5 level.

Other technology companies have spent years wrestling with misleading or incomplete financial statements from both the tech boom and bust years. Accounting fraud helped drive WorldCom to file the largest bankruptcy in U.S. history, while fellow phone equipment maker Lucent Technologies operated under a cloud for two years before reaching a settlement with the U.S. Securities and Exchange Commission that allowed it to put the matter to rest.

Homestore.com, AOL and Gateway all have had accounting probes by the SEC turn into criminal probes by federal investigators as well.

Fast Forward

“A company has to put this behind them quickly, or else they risk it becoming a drag on their business, especially in the post-Enron and WorldCom era,” Morningstar.com stock analyst Joseph Beaulieu told the E-Commerce Times. “In a field as competitive as the one Nortel is in, where customers are considering investing thousands or millions of dollars in their products, they can’t have this cloud hanging over their heads for long without it having a negative impact.”

Nortel may be trying to address that dilemma by taking decisive action, he added, “taking action to send a message that they’re going to get this behind them quickly.”

But the timing of the matters addressed in the probe could be significant, since current CEO Frank Dunn served as CFO for most of 2001.

Back on Track

Business has been improving for Nortel in recent quarters, and its stock climbed to a new one-year high of $8.50 per share less than a month ago.

In addition to renewed spending by its core customers, Nortel is seeing business from China and other Asian countries on the increase. It was one of several companies to reap a windfall of wireless communications contracts doled out earlier this year and two weeks ago said it had secured a contract to build a wireless communications network for China’s government-run railroad network.

IDC wireless infrastructure analyst Richard Dean told the E-Commerce Times that Nortel has seen enterprises and telecom companies seeking to upgrade their networks — and that customers venturing back into spending mode are increasingly value-conscious as they do so. Nortel has a solid foothold in several industries, including financial services and retail, where spending is growing the fastest among all industries.

“The bottom line is how well a company can deliver efficiency and cost savings over time,” Dean said. “I think that’s what will determine how well Nortel does in the long run, assuming they can move away from the distractions.”