The issue is key to the trial because the Crown argues that CEO Frank Dunn and other senior executives fraudulently encouraged adding a number of accruals into financial statements to make the company appear profitable – and reap themselves bonuses.
Brian Harrison, former director of planning and analysis at the fallen technology giant, testified Friday to explain the reasoning behind the why $24 million in so-called accruals were added to the books.
The defence cross-examined Harrison as part of its argument that the release of the funds were approved by external auditors.
Harrison said a number of financial items were included in the company's financial statement in early 2003 because there was no longer evidence to support keeping them in reserve.
Dunn, former CFO Douglas Beatty and ex-controller Michael Gollogly are accused of encouraging employees to use stores of cash, known as accruals, to manipulate financial statements in order to meet internal targets that would trigger return-to-profitability bonuses for senior executives.
Defence lawyers have maintained that there was no reason the accused executives would juggle the finances in the first two quarters of 2003 because even after the company's finances were twice restated for the period, data shows they still would have earned the nearly $10 million in bonuses that year.
The crux of the Crown's argument is that the accused were working backward in their accounting, meaning they started with end targets to achieve profitability and then manipulated numbers, through the use of a "cookie jar" of reserves to achieve those goals.
Prosecutors contend that under the direction of Dunn, Nortel employees were encouraged to use reserves of accruals from previous quarters to give the illusion the company had returned to profitability.
All three men have pleaded not guilty to the charges related to manipulating Nortel's books and defrauding the company of $12.8 million in bonus payments.
The Crown alleges Nortel's senior management released just enough onto their balance sheet to return the company to profitability and trigger millions of dollars of bonuses for senior management.
The company went on to restate its financial statements for the first two quarters of 2003, as well as for the full years of 2002, 2001 and 2000.
Dunn, Beatty and Gollogly were fired over the allegations in 2004.
