David Porter, counsel for Nortel's ex-CEO Frank Dunn, said Thursday in opening arguments on behalf of all the accused that the three men were working to clean up, rather than sully, financial statements that were later twice restated.
The second restatement came after the men were fired in 2004 over the allegations, which centre on events surrounding Nortel's financial reports for the first two quarters of 2003.
All three accused have pleaded not guilty to defrauding the company of $12.8 million in bonus payments — $9.7 million received in 2003 and $3.1 million in 2001.
The Crown has argued that Dunn, along with former CFO Douglas Beatty and ex-controller Michael Gollogly falsified Nortel's financial statements to show a return to profitability that would trigger millions of dollars of bonuses for them in 2003, even though the company was still in the red.
"What the Crown ignores, however, is that the second restatement of Nortel's financial statements confirmed that the entire return to profitability bonus would have been earned by the defendants ... in the 2003 fiscal year," Porter said.
Porter noted that restatements of financial report are common in the corporate world and not evidence of fraud.
The kind of white collar crime ring described by the Crown "would be unprecedented in its scope" and would have to involve hundreds of accredited accountants at both Nortel and Deloitte "somehow ultimately being co-ordinated in this alleged illegality by three senior executives," Porter said.
Not only was there no motive for the men to orchestrate a fraud, the company's independent auditors gave their stamp of approval to financial matters at Nortel, demonstrating the accused were not engaged in a scheme to juggle the books, he argued.
Porter detailed to the court, using a series of emails and other documents, the extent to which accounting firm Deloitte and Touche closely and continuously reviewed and approved the finances of the fallen telecom equipment maker.
He said Nortel, which was struggling with falling income and restructuring following the 2000-1 market crash in the technology sector, was very transparent about the accounting problems it faced, including a surplus of about $5.2 billion in so-called accruals, liabilities calculated in prior quarters, on its balance sheets.
"(There was) open discussion and a joint effort by Deloitte and Nortel to come to grips with the accounting problems facing the company at that time," Porter said.
The Nortel executives sought to save the company by cutting costs, in part through downsizing from about 90,000 employees in 2000 to about 36,000 by 2002.
A huge reduction in profits and income statement entries meant problems that appeared small caused a bigger impact on balance sheets than they had earlier, Porter argued.
By 2002, Nortel and its auditors were acutely aware that there was a problem with excess provisions on Nortel's balance sheets.
Complicating the problem was the fact that requests for supporting documentation for those accruals "were often met with the response that the employee who knew about the matter was one of the nearly sixty-thousand that had been let go from the company," Porter said.
Thus, the company took steps in 2003 to clean up its finances, especially in relation to the release of the accruals, Porter said, pointing out several documented instances of how closely involved the company's external auditor was in the process.
The Crown argued the former executives on trial did not release those excess accruals when they should have and instead added them to the books in the first and second quarters of 2003 to give the illusion the company had returned to profit.
Under an incentive plan for all Nortel employees, overseen by Dunn, a return to profitability triggered millions of dollars of bonuses in cash and stock to the three men on trial.
Internal documents presented in court showed that both the company and its auditors were aware of the impact to the "quality of earnings" of the release of $332 million of accruals in the first quarter of 2003 and another $372 million in the second quarter.
"A candid sharing of information concerning the releases, which Nortel proposed to make and made, reported to its auditors and the audit committee of Nortel is completely inconsistent with allegations of fraud," Porter told the court.