Nortel Networks Corp. last week said the U.S. Securities and Exchange Commission has launched a formal investigation into its accounting practices.
Nortel, a Canadian provider of voice-over-Internet protocol equipment, in October had launched an internal investigation into certain accrual practices dating back to 2000. The SEC investigation stems from the fact that Nortel has restated its financial results twice in the past six months and in late February said it may have to restate them again.
Nortel stock took a dive earlier in the year — dropping from $8.16 on Feb. 18 to $5.29 on March 29 — but appeared to be making a comeback, as investors believed that the investigation was largely completed.
Nortel has said it is fully cooperating with the SEC. The stock was up 7 cents per share on April 7, closing at $5.97.
Nortel had said in October that the SEC was conducting an informal investigation of the company.
Upgrading to a formal investigation gives the federal agency subpoena power for documents and financial records.
In March, Nortel suspended chief financial officer Douglas Beatty and controller Michael Gollogly with pay, adding that its continuing investigation of “certain accruals and provisions” would lead to a restatement of its first-half 2003 results, as well as figures from prior years.
Because of the investigations, Nortel hasn’t been able to file its 10-K financial statements with the SEC, which could put it in default on about $3.6 billion in debt and accelerate repayment if the delay lasts more than 90 days.
Most analysts don’t expect that to happen.
In November, Nortel said $952 million of liabilities — mainly accruals and provisions — on its June 30, 2002 financial statement should have been entered in earlier statements.
“These provisions were either initially recorded incorrectly in prior periods or not properly released or adjusted for changes in estimates in the appropriate periods,” the company said in an SEC filing.
The restatements were relatively small. For example, Nortel said it recognized about $92 million in revenue between 2002 and 2003 that should have been deferred to later periods. The result is that the restatements lower net losses in 2000, 2001 and 2002 and increased shareholders’ equity. Nortel has annual revenue of about $8 billion.
In the October statement, Nortel blamed the mistake on an “unprecedented period of business realignment” in 2001, when it had to eliminate thousands of jobs and shut down several operations after the bottom fell out of the telecom market.
Nortel said in an October statement that it has reduced its work force from 94,500 in Jan. 1, 2001 to 34,500 on Sept. 30, 2003.
During the same time period, Nortel slashed its facilities from 700 to 250, a reduction of about 20 million square feet of space.