Question: 1 Why would Nortel Networks a Canadian company hire a

1. Why would Nortel Networks, a Canadian company, hire a U.S. law firm to undertake an independent review of factors that led to restatement of accounting reports?
2. Why did the independent review focus on the “establishment and release of contractual liability and other related provisions” (also called accruals, reserves, or accrued liabilities)?
3. How did the failure to follow U.S. GAAP permit the manipulation of Earnings before Taxes (EBT) and lead to fraudulent behavior?
4. Describe the Nortel Return to Profitability (RTP) and Restricted Stock Units (RSU) bonus plans. What did the board of directors expect these plans to achieve?
5. Were the misstatements of EBT and bonuses paid material in an accounting sense?
6. Why didn’t Nortel’s auditor discover the misstatements?
7. Why didn’t the Audit Committee, or board as a whole, anticipate the manipulation?
8. What questions should the Audit Committee or board have asked?
9. What internal control flaws permitted the fraudulent manipulation to occur without detection?
10. Would the new requirements spawned by the Sarbanes-Oxley Act of 2002 (SOX) and its SEC Regulations have prevented the manipulation per se—why or why not?
11. How have the expectations of the Audit Committee changed since SOX with regard to corporate culture, why is this so, and how can the Audit Committee ensure that these are met?
12. Should the Audit Committee or the whole board be held legally liable for the weaknesses noted in the review? Why and why not?
13. In February 2005, Nortel hired a new Chief Ethics and Compliance Officer using an incentive compensation scheme based upon profits. Is this a sound arrangement?
14. Nortel has issued a new code of conduct with striking similarity to their previous version. Why might this new code be more effective than the last?
15. In retrospect, what were the major failings of the Nortel Audit Committee? Were they the same as those for the board as a whole?

By the late 1990s, Nortel Networks Corporation, headquartered in Brampton, Ontario, Canada, was one of the giants of the telecommunications industry. Seventy-five percent of North America’s Internet traffic was carried by Nortel equipment, 1 which was manufactured by 73,000 employees around the world. The Company’s shares were listed on both the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSE). By July 2000, the company had issued over 3.8 billion shares worth C$473.1 billion in market capitalization at a peak price of C$124.50. So dominant was Nortel that it accounted for more than one-third the value of the S & P/TSE 300 Composite Index.

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