Ethical Obligations and Decision-Making in Accounting: Text and Cases 4th Edition by Steven Mintz,Roselyn Morris

Exercise 1

Nortel Networks
Questions
1. Discuss Nortel's accounting for the following transactions and why they were not in conformity with GAAP:
• Revenue recognition
• Reserve accounting
• Accounting for contingent liabilities
2. The following two statements are made in the case:
• Accounting experts said the case is sure to be closely watched by others in the business community for the message it sends about where the line lies between fraud and the acceptable use of discretion in accounting.
• Darren Henderson opined that "The message... is that it is okay to use accounting judgments to achieve desired outcomes, [such as] a certain earnings target."
Evaluate these statements from the perspectives of representational faithfulness and fair presentation of the financial results reported by Nortel.
3. During the trial, lawyers for the accused said that the men believed that the accounting decisions they made were appropriate at the time, and that the accounting treatment was approved by Nortel's auditors from Deloitte Touche. Judge Marrocco accepted these arguments. Marrocco added he was "not satisfied beyond a reasonable doubt" that the trio [i.e., Dunn, Beatty, and Gollogly] had "deliberately misrepresented" financial results. Given the facts of the case do you believe Judge Marrocco's decision was justified? Explain.
4. Does it appear from the facts of the case that the Deloitte auditors met their ethical and professional responsibilities in the audit of Nortel's financial statements?