Posted by & filed under Auditing, Fraud Accounting, Uncategorized.

The first witness in the fraud trial of three former Nortel Networks executives says external auditors were “uncomfortable” with some of the company’s accounting practices.

 The witness, Brian Harrison, Nortel’s former director of financial planning and analysis, says he had “very little” contact with auditors in his role.But Harrison says that in one rare meeting he had with auditors Deloitte and Touche, the firm challenged why Nortel would release some so-called excess accruals but not others.

 Prosecutors contend that under the direction of former CEO Frank Dunn, employees were encouraged to use reserves of accruals from previous quarters to give the illusion the company had returned to profitability.

 Accrual based accounting: Records the effect of economic or business transactions as they occur, no matter when the cash is received or payment is made.

 The Crown alleges Nortel’s senior management released just enough onto their balance sheet to return the company to profitability and trigger millions of dollars of bonuses for senior management.

 Defence lawyers argue that the auditors continually reviewed and approved Nortel’s books.

 Discussion Questions:

  1. Distinguish Accrual based accounting from Cash based accounting?
  2. Do you think that Bonuses or Stock Options may have had any influence to manipulate financial information?
  3. Discuss with the class or fellow students and your teacher, some of the ways financial statements may be manipulated to increase profit?

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