Restatement Talk Rattles Nortel

Updated from Oct. 23

Nortel's (NT Quote) road to recovery took another twist Thursday as investors scratched their heads at a huge and hard-to-figure restatement plan. Its stock fell 6% Friday morning when trading resumed.

The company surprised Wall Street by saying it would restate its last three years' financials to fix some $900 million worth of accounting mistakes. Nortel stressed that it is examining its books but offered few specifics as to what they will look like when final terms come out next month in regulatory filings.

The company said it would start an independent review "to examine the facts and circumstances leading to the need to restate Nortel Networks' financial statements for the relevant periods and to consider appropriate improvements to processes and procedures." The company insisted that the restatement wouldn't add to its massive losses for those periods, and in some cases would narrow them.

Some analysts found it curious that CEO Frank Dunn -- who was the company's top accounting executive during the period in question -- essentially called for a sweeping review of his own work.

"It's probably a way to put the past in the past and make sure nothing comes back to haunt them," says Legg Mason analyst Timm Bechter. "They're probably want to totally clean up whatever was back there that was keeping them up at night." Bechter has a buy rating on the stock.

Several times on a conference call with analysts Thursday, Dunn said of his self-inflicted audit that he "takes the issue very seriously" and called the matter "something we learn from."

The accounting issue overshadowed the company's overall performance for the third quarter, which showed continued declines in conventional phone gear but sequential gains in wireless equipment sales.

The company posted third-quarter earnings that were broadly in line with analysts' expectations. For the quarter ended Sept. 30, the Brompton, Ontario, maker of phone gear posted a profit of $179 million, or 4 cents a share, on sales of $2.27 billion.