Accounting Talk Pummels Nortel

Nortel ( NT) shares slipped 5% Friday after the company's accounting mess got another airing in the press.

A front-page story in Friday's edition of The Wall Street Journal suggested once again that accounting trickery was behind some of the company's soon-to-be-restated first-half 2003 profit. The report shines new light on a bushelful of return-to-profit bonuses paid by the Brampton, Ontario, telecom equipment giant.

This spring, Nortel fired CEO Frank Dunn and a handful of other top executives for cause after determining that it would have to restate financial results going back several years. The company said the restatement would slash 2003 profits in half and totally wipe out a first-half profit in that year that took analysts and investors by surprise.

For its part, Nortel emphasized Friday that it would be improper to comment on any accounting issues, what with its own internal review and various government investigations continuing. But a spokeswoman reiterated the company's position, stated in broader terms on a June 2 conference call, that Nortel's board would seek to recover any bonuses that were issued as a result of improper actions by employees.

The company paid out more than $50 million in bonuses to select officers last year after posting the first-half profit. Dunn alone received $2.15 million, according to a May report in The Globe & Mail of Toronto.

TheStreet.com reported last month that Nortel's latest accounting update made clear that the 2003 bonus payments were based on profits that never existed.

The company's June 2 update indicated that 2003's phantom profits came from its core business of selling telecom gear -- not from selling assets or other one-time events. That disclosure is crucial because it draws a link between the company's oft-questioned executive pay incentive plan and the recent accounting missteps.

Nortel's filings specified that bonuses would be paid only if the company reached a profit on "pro forma earnings from continuing operations." But even at the time the company posted the stunning swing, the numbers failed to add up.

Indeed, people were questioning those profits from the day they were reported. The link between the bonuses and Nortel's slippery profit number was flagged a year ago in TheStreet.com. At the time, several observers suggested that the company had stuffed the continuing operations profit line with noncore gains in order to make executives and employees eligible for millions of dollars in "return to profit" bonuses.

Nortel has said its internal probe is ongoing and that it hopes to release revised financials later this month.

On Friday, Nortel slipped 24 cents to $4.58.

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