SEC Pops In on Nortel
Shares in the Canadian telecom equipment giant fell 5 percent after the company announced that the Securities and Exchange Commission (SEC) has initiated a formal investigation into accounting issues that have been nagging the company for at least the past year (see Nortel Announces SEC Investigation).
It's hard to tell what's going on without more information from the SEC, which generally doesn't comment on ongoing investigations. And there's likely to be little information on the matter until Nortel holds its first-quarter conference call in a couple weeks.
Last month, Nortel put its CFO on leave after finding trouble with efforts to restate Nortel’s earnings as far back as 2000. Douglas Beatty, the company's incumbent chief financial officer, and Michael Gollogly, the incumbent controller, were placed on paid leave of absence, pending the completion of an independent review by Nortel's audit committee. Nortel named William Kerr as interim CFO and Mary Anne Pahapill as interim controller.
The accounting questions may not involve anything new -- but that may be part of the problem, as Nortel has failed to clear up a long-running inquiry into its earnings statements.
Last fall, for example, Nortel executives referred to errors that turned up in a long-term internal audit of its books during a third-quarter 2003 conference call (see Nortel Keeps to Profit Path). It now appears that it was unable to resolve the matters through an internal audit and restatement of 2003 results, which will now have to be restated again.
In the past, the company has said the problems with the books involved a restatement of financial results for 2000, 2001, 2002, and the first two quarters of 2003. These restatements included liabilities reported on June 30, 2003, that were required to be reallocated "into prior periods." Also, Nortel said in the past that it found $92 million in revenue for the first two quarters of 2003 that was incorrectly recognized and needed to be deferred.
These complicated accounting procedures don’t appear to affect the core cash flow of Nortel’s business, but they do affect how and when the company recognized profits and revenues. The new SEC involvement now has some folks scratching their heads. Several investment managers contacted by Light Reading declined to speak on the record, but they said on background that there's not enough information to draw any conclusions -- and that they'll stay away from the company's shares at least until the company's first-quarter conference call.
Gabriel Lowy, an analyst at Blaylock & Partners, says it's more likely that the SEC investigation involves an autopsy of last year’s muffed restatement rather than anything new.
"It’s not unexpected,” said Lowy, “But I don’t think it implies that there’s any broad-scale accounting problem. They’ve already resolved it internally, and the SEC is looking into this as a mere formality."
But investors haven't exactly been filled with confidence over the fact that Nortel can't seem to put the matter to rest, and Lowy adds that the company needs to resolve the issue soon before it further rattles the market. "I think it’s pertinent that they resolve it by their next earnings," says Lowy. "The pressure is only going to grow in the company, and it’s going to get intense on [Nortel CEO] Frank Dunn.”
Dunn, in fact, may find himself in the hotseat, considering that prior to being CEO, he was the CFO in charge of the books during the 2000-2002 periods that involved the accounting restatements that have caused the company problems.
This morning Nortel shares were trading down $0.29 (5%) to $6.00 in morning trading and are well off their 52-week high of $8.50.
— R. Scott Raynovich, US Editor, Light Reading