Nortel fires CEO and CFO after review of accounting practices

Nortel Networks has shaken up its top management, firing its CEO and two other top executives as a result of an internal review of the company's accounting practices.

On Wednesday, the telecommunications equipment maker announced that it has fired CEO Frank Dunn, CFO Douglas Beatty and Controller Michael Gollogly. Beatty and Gollogly were placed on paid leave of absence on 15 March.

"The actions taken by Nortel's board are about accountability for financial reporting," Lynton Wilson, board chairman, said during a conference call with analysts. "The board believes these actions are important steps in restoring confidence in the company's leadership."

When asked if the dismissal of Dunn and the two other executives were the result of fraud, Wilson said that he could not comment. "The investigations are ongoing, and it's inappropriate to provide specifics," he said. Wilson said he was unaware of any criminal investigation.

Dunn joined Nortel, which was then called Northern Electric, in 1976, straight out of school. He spent his career in various positions within Nortel. In 1999 he was appointed CFO of the company, and two years later became CEO.

"The decision to terminate Frank Dunn was difficult," Wilson said. "His service with the company spans some 28 years. He has worked extremely hard and has had some great successes."

William Owens, a Nortel board member since 2002, has been appointed president and CEO. Previously, Owens served as CEO of Teledesic, a satellite communications company. He also once held the second-highest rank in the US military.

William Kerr, who has been acting CFO, and MaryAnne Pahapill, who stepped in as controller on 15 March, will now hold these positions permanently.

The board of directors also announced that four others who worked as finance executives during the periods under review have been placed on paid leave of absence pending further investigation.

The management shakeup comes as Nortel conducts an internal investigation of its accounting practices. Nortel's internal auditors began looking into the company's finances after it was discovered that roughly $900m in liabilities had been either recorded incorrectly in prior periods or had not been properly released in the appropriate periods.

In October and then in March, the company announced that it would likely restate results for certain periods. It has already restated earnings from 2000, 2001 and 2002, along with figures for the first two quarters of 2003.

Earlier this month, the Securities and Exchange Commission launched a formal investigation into Nortel's restatements.

Nortel provided an update on the investigation in a statement released Wednesday. While the company did not provide exact details, it said that unaudited results for the year ended 31 December 2003, will need to be revised. The company estimates that net earnings for 2003 will drop by 50 per cent and that the company will report a net loss for the first half of 2003. Results reported for each quarter in 2003 and for earlier periods including 2002 and 2001 will also likely be restated.

Wall Street analysts reacted positively to the news of the dismissals, saying that they think the worst is now behind the company. Stephen Kamman, an analyst with CIBC World Markets, said he expects the company to deliver "squeaky-clean financials" when it finally reports restated earnings. He upgraded the company's stock to "Sector Outperform" from "Sector Perform".

"We applaud Nortel's board for taking quick action to respond to the situation and see this as a very positive sign for investors," he wrote in a research note to investors. "We do not believe underlying fundamentals at Nortel have changed at all."

But Kamman also notes that Nortel isn't completely out of the woods yet. The company could still face problems with its $3.8bn debt if it does not file its financial results with the SEC by 30 June. The company has already missed a filing deadline of 30 March, which means that it is not in compliance with agreements on $1.8bn in long-term debt. Currently, debt holders have chosen not to accelerate the debt payments, but Kamman notes that they could.

In addition, the company could lose its Nasdaq ticker symbol if it fails to meet the second reporting deadline.

Marguerite Reardon writes for CNET News.com