Nortel Networks Corporation (Nortel), based in Brampton, Ontario, is a global supplier of networking solutions and services. In 2005, the company released the findings of an independent review as a result of continuing problems with its accounting. The review revealed that three former company executives, the chief executive officer, the chief financial officer, and the controller, used accounting practices that increased reported earnings from late 2002 to mid 2003. Through Nortel's internal investigation, several problems had become known, not the least of which was $ 900 million of inappropriately reported liabilities and approximately $ 250 million of overstated net earnings. This mattered to the executives who received a bonus if earnings before tax exceeded specific levels.
In April 2004, Nortel issued a news release announcing the appointment of its new chief executive officer (CEO), Mr. William Owens, and the termination of its previous CEO, for cause. The previous CEO left his position on April 28 and left the company's board of directors on May 21, 2004. Neither the chairman of the board of directors nor the new CEO would comment on the termination. A month earlier the chief financial officer and the controller had been placed on paid leave of absence and they too were fired. A day later, the U. S. Securities and Exchange Commission announced that it was investigating Nortel, and then the Ontario Securities Commission launched its own investigation. But the worst was yet to come.
In May 2004, a U. S. federal grand jury subpoenaed Nortel for accounting records and other documents prepared for the previous four years during which the previous CEO, an accountant, had served as chief financial officer. A few days later the Ontario Public Service Employees Union Pension Trust filed a class action lawsuit to recover losses arising from its investment in Nortel shares between April 2003 and 2005, based on fraudulent financial information. By August 2004, the Royal Canadian Mounted Police began a Canadian criminal investigation into the former CEO's activities. The cost to Nortel has been over $ 2.4 billion in cash awarded to the Ontario pension fund in April 2005, and the company sued the former CEO to recover this money from him personally. Pursuant to the independent review, 12 senior executives agreed to repay a total of $ 8.6 million in bonuses they received from the company in the past.
1. Describe the parties that were harmed or helped by this fraud.
2. Explain how greed may have contributed to this fraud.
3. Why do you think the independent auditors failed to catch the fraud?