Accountants and senior management at Dell cooked the books for more than three years, moving funds between accounts so the company could show it was meeting its quarterly targets, the company admitted in a filing this week with the Securities and Exchange Commission.
That's the conclusion of a year-long independent investigation into financial shenanigans at the company from 2003 through the first quarter of 2007.
Dell's malfeasance included creating and releasing accrual and reserves "for the purpose of enhancing internal performance measures or reported results," transferring excess accruals between liability accounts, and using excess balances to offset unrelated expenses in later periods, the company said.
The adjustments were as much as several million dollars per quarter. In addition, business unit executives provided incomplete finances to headquarters, and "purposefully" lied to auditors, providing incorrect or incomplete information.
Senior Managers Implicated
"We did find evidence of fraud," CFO Donald J. Carty said in a conference call with investors. "This has been a very difficult and arduous road for the company. This is not a happy story." In a statement, Carty promised a "rigorous examination" of Dell's accounting and finance processes, along with several remedial actions.
Michael Dell, who returned as chairman and CEO in January, said the company is "committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity." He also promised a "renewed management focus on decision-making and processes."
Given the concessions of "fraud" and "senior management" involvement, might there be criminal investigations? It's unlikely but not out of the question, said Peter Henning, a law professor at Wayne State University and author of the White Collar Crime blog.
"It would depend on if it was an isolated incident or a pattern of behavior," Henning said. "Was it in the same part of the company or different parts? If it was funneled through one or two people, that could make it a criminal case." The Department of Justice has been "in the vicinity," Henning added. The DOJ office for the southern district of New York issued a subpoena about nine months ago, and an SEC investigation is expected to continue.
A Founder's Return
Dell expects to reduce its net income for the period by $50 million to $150 million, the company said. It had previously stated net income of $12 billion for the period. The greatest overstatements occurred in Q1 of 2003 and Q2 of 2004; those earnings will be reduced 10 percent to 13 percent.
The company identified two major deficiencies: control and reporting. "We did not maintain a tone and control consciousness that consistently emphasized strict adherence to generally accepted accounting principles," the company said in the filing.
With the return of Dell as CEO and the appointment of Carty as CFO, the company is poised to right itself, the computer-maker said. Dell is implementing a remediation plan that includes adhering to GAAP, beefing up internal auditing, and segregating accounting and finance from planning and forecasting duties.
The restatement period correlates with the time in which consumer sales of PCs started to change the dynamics of the PC industry and Dell left the company. "It is important that Michael's back," said Tim Bajarin, principal analyst with Creative Strategies.
The company failed to respond to the explosion of the consumer market in 2003 and consumers' reluctance to buy PCs online. Dell made the decision to dramatically expand Dell's retail presence, Bajarin said. "He's the only one who could have made that decision." Looking forward, Bajarin noted, Dell will be an aggressive competitor to HP. "I would not underestimate Dell's ability to rally and expand to meet the needs of consumers," he said.
Dell will issue revised reports to the SEC in November. Its annual shareholders meeting is scheduled for December 4, 2007. Results for the second quarter of 2008 are due August 30.