Nortel Networks Internalcontrols
Business and Management
Submitted By HIEUTRAN
Nortel Networks was once a Canadian telecommunications corporation worth $300 billion dollar that nearly employed 90,000 people during its height on operations in the 90’s (The Canadian Press 2014). In 2009 Nortel networks had to file for bankruptcy. Nortel’s bankruptcy is considered one of Canada’s largest bankruptcy cases in Canadian history (The Canadian Press 2014). In 2007 the Securities Exchange Commission files a lawsuit against Nortel for accounting fraud. Nortel was accused of not following the Generally Accepted Accounting Principles. The two main principles that Nortel executives were accused of were going against the revenue recognition principle and the provisions principles.
Nortel broke the revenue recognition principle for the sole purpose of meeting budgeted sales and revenues (Cullen 2007). What Nortel would do was to not recognize expenses right away and to recognize unearned revenue (Cullen 2007). The reason for breaking these rules was to magnify their revenue and profits. Nortel broke the provisions principle by recognizing their expenses later on causing profits to increase (Cullen 2007).
While breaking these rules managers and executive members of Nortel would still collect their yearly bonuses and benefits based on the profits the company would make that year. Nortel on paper was showing that it had made more revenue than it should. The managers in the financial departments all had their ethical issues. Maybe Nortel needed more segregation of duties. The thing was that the top executives were being charged for fraud because they had known of what was going on. The managers who benefited were the ones who were accepting the extra bonuses that were being created by the extra profit and revenue from malpractice of the accounting standards within the company. Perhaps the falsifying of the financial result was due to greed of the mangers and top executives. What I recommend to prevent the falsifying of the financial records of Nortel is to segregate more of the duties, create a code of conduct that every employee must read over and sign, and during the hiring process can ask questions based on ethics. Bibliography
Cullen, Drew. Fraud, not incompetence, to blame for Nortel's accounting fiasco. march 12, 2007.
The Canadian Press. CBC. May 12, 2014. http://www.cbc.ca/news/business/nortel-bankruptcy-hearings-to-divide-7-3b-in-assets-1.2639494 (accessed May 30, 2014).