The suspension of chief financial officer Douglas Beatty and controller Michael Gollogly came less than a week after the telecom equipment maker warned it would likely restate its results for the second time in six months and delay filing key documents with U.S. regulators.
The bad news stems from an independent accounting review launched last year by Nortel's audit committee, initially viewed by many as a housekeeping exercise.
But with U.S. accounting scandals like Enron, WorldCom and Freddie Mac still fresh in their minds, analysts are now questioning if the review has uncovered deeper and more worrying problems with Nortel's accounting.
?It's tough to know what to think?I don't know whether the suspension of the CFO is just them being thorough and wanting to have a completely independent review or if that implies something necessarily negative,'' said A.G. Edwards analyst Gregory Teets.
Nortel was the most active stock in North America on Monday, falling 18.7 percent in Toronto on volume of 99 million shares. In New York it fell $1.18 to $5.24 on volume of almost 100 million shares.
The stock has fallen 23 percent since last week's warning, but is still up 27 percent on the year thanks to a January rally fueled by a high profile contract and unaudited fourth-quarter results that beat forecasts.
J.P. Morgan analyst Ehud Gelblum downgraded Nortel to ?neutral? from ?overweight,? citing the stock's uncertainty.
?We believe today's announcement is an indication that accounting problems could be more serious than we had thought,? he said in a note to clients.
Beatty had been CFO since July 2002, when he took over from chief executive Frank Dunn. Dunn held both roles for several months that year after former CFO Terry Hungle left the company for trading Nortel stock in violation of company policy.
Brampton-Ontario based Nortel named William Kerr as interim chief financial officer and MaryAnne Pahapill as interim controller. Kerr worked at Nortel from 1994 to 2001, holding a number of senior financial positions, including controller.
Nortel spokeswoman Tina Warren said she could not give the reasons for the suspension because the review is still ongoing. The audit committee has hired the law firm of Wilmer Cutler Pickering LLP to help conduct the review.
Nortel filed notice with the U.S. Securities and Exchange Commission on Monday that the delay in the filing of 2003 results will extend beyond March 30.
Sanford Bernstein analyst Paul Sagawa said he thought investors were overreacting and believes Nortel is simply trying to be scrupulously honest. He said he would be ?absolutely shocked? if fraud were an issue.
?I know the street gets worried about stuff like this because, after Enron and WorldCom and all that stuff, there's a lot of suspicion about major restatements. To me, this is simply a case of lack of continuity and perhaps a bit of inexperience,? he said.