Nortel Scandal Brings Back the Fear

By Douglas Rushkoff. Published in The Feature on 30 April 2004

Just last week, it looked like a Fed rate hike or the cooling of China’s markets were Wall Street’s biggest worries. Now, corporate malfeasance has roared back into the headlines.

Nortel Networks Corporation is reviving both professional and personal investors’ worst fears that the accounting woes of the Tyco/Enron Era are not really behind us, and that they’ve come to roost smack in the middle of the telecommunications industry.

Indeed, the Canadian telecommunications giant fired its CEO Frank Dunn, Chief Financial Officer Douglas Beatty and Controller Michael Gollogly “for cause” earlier this week, at least in part because they overstated the company’s 2003 earnings by 50%. Restatements for the previous three years are forthcoming.

The news sent chills down more than a few spines, prompting Standard & Poor’s to cut Nortel’s ratings well below junk to B-, and bringing other issues in the sector down for the ride. Lucent’s share price, for one, has dropped precipitously along with Nortel as the scandal took shape. Whether the implications for the entire sector will be short lived or more extended has yet to be seen.

What’s particularly irksome about Nortel’s misstatements and subsequent purges is that there was little or need for Nortel’s executives to have lied. The company had begun a true turnaround under Frank Dunn - at least as far as new orders were concerned. In fact, Nortel and Lucent’s recent orders from Eastern Europe and China, along with new hiring in the hi tech sector, appeared to indicate brighter days ahead for the entire telecommunications industry - and the people who invest in their stocks.

Some analysts are already blaming an executive bonus scheme based on quarterly results as motive for the executives to have cooked their books, leading many to recall the worst scandals of the era. Now, it is up to the telecommunications industry to prove not only that its bottom line can remain in the black, but that it adds up at all.