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Case Study: Nortel Executives Fight Allegations of Cooking the Books

In the first two editions of Digging Deeper, we dug into the books of former Canadian tech darling Nortel, which at its peak employed 95,000 people. The company declared bankruptcy on January 14, 2009, and reached a deal to sell the last of its assets July 1, 2012. One of the final chapters in the company’s history was the criminal investigation into allegations that former executives Frank Dunn, Douglas Beatty, and Michael Gollogly “cooked the books to collect their multimillion dollar bonuses.”2 They faced a maximum penalty of 14 years in prison if the judge in the case found them guilty. As Ottawa Citizen associate business editor, James Bagnall, explains in the forward of his book 100 Days: The Rush to Judgment That Killed Nortel, “Something profound had been buried in the extraordinary circumstances of 2004, when Nortel’s directors sacked their top three financial executives. The company had been so close to clawing its way back to health, then lost its momentum after a host of outside investigators took control of the company’s agenda.”3

As their trial approached in 2012, Bagnall was asked to write about the upcoming trial, a process many, including his newsroom colleagues, assumed would find the three former executives guilty. What he thought would be a very straightforward story turned out to be anything but. Bagnall dug through court documents, especially the dozens of documents from pre-trial hearings.

“Dunn’s lawyers had asked what, exactly, was wrong with how Nortel had accounted for more than 30 allegedly fraudulent transactions,” Bagnall writes in his account of his story that won National Newspaper’s 2012 award for Explanatory Work.

“As I examined the Ontario Security Exchange Commission’s answers, I realized that its investigators didn’t have an answer.”4

The more Bagnall dug, his conviction that the three might be found innocent grew. “But then I confronted an unexpected difficulty,” he continues. “The vast majority of the people who were following the trial believed that the three Nortel executives were guilty, and that I was naive to believe otherwise. This included members of the Citizen’s newsroom.”

On January 14, 2013, an Ontario judge acquitted the three, the last sordid chapter in the story of a company’s downfall when that had begun several years earlier.

In the several years Bagnall spent several covering Nortel, he used a number of resources, such as court documents, that we have discussed elsewhere in the book. But in challenging the conventional wisdom at the supposed guilt of the three former executives, he had to pay close attention to numbers that tracked the company’s losses or liability and profits, key indicators of how a company is doing, and executive salaries. He had to get close to the numbers in order to understand the story, and then interview the experts and insiders he had built up as sources. These interviews were key, as they helped him put the numbers in context.

This is a process that is crucial when following money. In this case, it was Nortel. In other cases, it could be the local school board, hospital, or government at the municipal, provincial, or federal level. In short, it could be any institution that is legally obliged to tell the public how it spends money.