Nortel's (NT) rollicking audit voyage seems to have struck an iceberg.
The Brampton, Ontario, telecom equipment maker said Thursday that it has found $3.1 billion in misbooked revenue in 1999 and 2000, including $250 million in entirely bogus sales recorded during that period. The findings threw yet another delay into a protracted restatement process and knocked Nortel shares down 7%.
Nortel started probing its books last year and now, after at least four postponements, says it may not be able to update its financial filings until mid-January. Nortel said earlier this year that it hoped to file restated 2003 results this September.
The latest revelation comes as a shock to Nortel watchers, who just two weeks ago heard assurances from company executives that the accounting review was nearly complete.
"They've gone from having some credibility to having none," says Duncan Stewart, a money manager with Tera Capital in Toronto. This company is "run by clowns," says Stewart, adding that he owns the stock, and he's "not happy about" that fact.
It appears Nortel booked sales in 1999 and 2000, during the Internet construction boom, that should have been recognized over a longer period. Much of the errors were recorded in Nortel's optical networking unit, which was posting 40% annual sales growth rates around the turn of the century.
The company says most of the misbooked revenue during the 1999 and 2000 period will be applied to later years. This will result in a net increase in 2001 revenue of $1.35 billion, and rises of $450 million in both 2002 and 2003.
CEO Bill Owens, who replaced former chief Frank Dunn earlier this year, said the newest set of bookkeeping errors was a recent discovery and will require a closer look.
"In the course of the Company's reviews over the last two weeks, we have found a level of revenue restatement which warrants that we undertake a deliberate, focused but bounded double-checking of several revenue areas," Owens said in a press release Thursday. "We have taken this decision to postpone our filings as a prudent measure to take the steps needed to ensure that we have captured all necessary corrections and adjustments in our restated results."
The talk of prudence is wearing thin in some quarters, however. "How can they tell everyone they were so certain two weeks ago?" asks money manager Stewart. "The company seems like it doesn't know what's going on."
But some observers say Nortel's new executives are at least making an effort to appear accountable and committed to correcting the problems they inherited.
"At least Owens isn't glossing over this," says one former Nortel manager. "He's taking it on the chin, but I believe he's doing the right thing."
Even so, Nortel's string of financial filing delays has run the company afoul of regulatory requirements,
New York Stock Exchange
guidelines and its credit agreements.
Last month, Nortel received its most recent waiver from its lender Export Development Canada, but that expires on Nov. 19. Nortel says it is seeking another waiver.
Nortel stumbled into accounting scandal early this year after internal audits revealed the company had overstated 2003 earnings by $300 million. Those bogus profits were central to a round of return-to-profit bonuses that
a few observers flagged last year.
The disclosure was crucial because it drew a link between the company's controversial executive pay incentive plan and the recent accounting missteps. The link became clearer after the company fired its top execs, including former CEO Dunn. In August, Nortel fired an additional seven executives for their role in fluffing up the company's earnings, bringing the toll in the book-cooking scheme to 10.
Dunn was the company's CFO in 1999 and 2000, prior to his promotion to CEO. Dunn's attorney, Tom Heintzman, was unavailable for comment.
Nortel fell 25 cents to $3.33.