RSSDell Admits Fraud in Financial Reporting, Will Restate Earnings Since 2003
By Scott M. Fulton, III | Published August 16, 2007, 7:16 PM
In an historic admission of culpability, Dell Computer this afternoon announced that its internal review of accounting practices dating back to its 2003 fiscal year turned up evidence of senior executives having adjusted its balance sheets in order for the company to meet specific financial goals.
This admission, if validated by the US Securities and Exchange Commission which is also investigating Dell, would go way beyond the initial subject matter of the accounting scandal. That investigation looked into whether the issuance of backdated stock options to senior executives was intentionally not reported on the company's balance sheets as expenses.
Now, the admission made by Dell's new financial team - led by new Vice Chairman and CFO Don J. Carty, appointed last December - acknowledges what can only be described legally as fraud, though Carty carefully refrained from referring to it as such during a hastily-arranged conference call Thursday afternoon.
"Obviously if you recognize revenue inappropriately, it was inappropriate," responded Carty to a direct question from one analyst about whether the activity the internal review turned up, constituted fraud.
In the company's long-delayed 8-K report to the SEC, issued just this afternoon, the company made the following admission:
"The investigation found evidence that, in that timeframe [between fiscal 2003 and 2006], account balances were reviewed, sometimes at the request or with the knowledge of senior executives, with the goal of seeking adjustments so that quarterly performance objectives could be met. The investigation concluded that a number of these adjustments were improper, including the creation and release of accruals and reserves that appear to have been made for the purpose of enhancing internal performance measures or reported results, as well as the transfer of excess accruals from one liability account to another and the use of the excess balances to offset unrelated expenses in later periods. The investigation found that sometimes business unit personnel did not provide complete information to corporate headquarters and, in a number of instances, purposefully incorrect or incomplete information about these activities was provided to internal or external auditors."
As the 8-K report described, much of this activity consisted of moving money from one account to help pad another. As a result, the actual amount of the restatement of earnings may actually not be very large - perhaps less than 1% of the company's earnings for each of the four fiscal years in question. But Carty's statements implied that the amount of the actual misstatements could be much larger than this 1%, though the solution may simply be to move the imbalanced figures back to the departments where they belong, for what is being called reversibility.
"That some of these things are reversing themselves, I think, doesn't obviate the fact that we had serious control deficiencies," Carty said today. "That should not have happened. But I think you can see by the fact that, in the end, we don't have a significant financial impact on our cumulative [profit and loss], we don't have one on the balance sheet, suggests that most of this reverses itself."
The 8-K report tried to frame the extent of these improper adjustments of just a meager few thousand or million here and there, in the context of a company that reaped tens of millions in revenue. "Nevertheless, the errors and irregularities identified in the course of the investigation revealed deficiencies in our accounting and financial control environment that require corrective and remedial actions," the 8-K report went on.
However, Carty was forced to admit today the existence of a single overseas transaction that could not be reversed by simply shifting balances back. The identity of that transaction and the parties involved, besides Dell, could not yet be revealed, he said.
Some of those remedial actions have already been taken, Carty said this afternoon. Without naming names, he implied that all participants in this scheme are no longer Dell employees. One noteworthy former Dell employee whose name did not emerge in conversation is Kevin Rollins, who resigned as CEO last January to be replaced by company founder and former CEO Michael Dell. Another is Jim Schneider, the company's former chief financial officer, whom Carty replaced in January. Their departure from the company was described in the 8-K report as part of its remedial action, "both to address the identified control deficiencies and to enhance our overall financial control environment."
"This is not a happy story for Dell, nor one that we're terribly proud of," Carty concluded today, "but I do think this rigorous examination of our accounting and financial reporting processes, along with the remedial actions, have made and will continue to make Dell a far stronger company, and it will definitely provide a solid foundation in which we're able to move our business forward, and we absolutely want to move our business forward."
Disappointment. How far the great have fallen huh??? Just is not the same company it once was... Nope, not even a shadow of it... True disappointment indeed. Well I guess we can expect more. no no I am not in India, my name is Bob.. How can I place you on hold today?? For a long time to come to make up for this huge scandal once again...
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cash rules everything around me.
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Great... and I just bought a Dell... sigh.
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The only thing Dell is sorry about is the fact that they got caught. Kevin Rollins may have been the scapegoat but Michel Dell is still same man with the same lack of morals running things.
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And what will this investigation due to these wrong doers? Nothing, absolutely nothing. This will continue in corporate America. Of course, unless the wrong doer is a woman or minority, then the DOJ will make an example of you. Just like Martha Stuarts.
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Yea...I guess if you consider millions and millions of dollars in fines and possible jail time nothing...
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It is nothing. Possible is a really big IF. The fines are a joke. Steal a $1 and fines 10 cents. There are so many frauds reported, how many actually go to jail or get fines? There are only a handful of them, they are big case like Enron and Worldcom.
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The shareholders don't like it, and when the shareholders are not happy Dell is not happy.
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Derr...when a company does this (misstatements, inproper adjustments etc.) isn't it done to defraud current and future shareholders and other investors...and in so doing fill their own pockets with undeserved bonuses for meeting goals and selling their stock which is not valued correctly? The employees are Dell and the only reason the bad ones are upset is that they got caught just as was stated before...
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I think you misunderstood my post. I meant, yes the shareholders don't like it when the company rips them off or gets into legal trouble. When the shareholders get pissed off, stock prices go down, and so does the company. My point was not to worry about the fines not being so large, that's the least of their trouble.
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To be honest, this whole thing stinks, but Dell is still the best place to buy a PC when you are feeling lazy and your father-in-law asks you to find one for your sister-in-law's freshman year of college.
AMD 64-bit Dual Core, 2GB RAM, 160GB hard drive, 19" widescreen monitor and printer all for $623.
At least I don't think I got hosed on that deal. For those of you who say I could have built one, please refer to my above statement about laziness :)
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oh, really....?
why is this news!
what is a confirmation is that Dell is really managed by a bunch of idiots. Ethical employees would have raised hell but would have also found themselves in the unemployment line for not playing ball.
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Was this that ordeal that ties in with Intel paying them cash under the table for using their processors exclusively or is this something different?
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Something different, I believe. To my knowledge, the Intel deal is part of the AMD/Intel trial where AMD alleges that Intel gives significant "benefits" for exclusive use of their processors, and if true, I doubt it's limited to Dell.
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While the party in the overseas transaction Carty mentioned was never named, my guess is that it couldn't be Intel because that would probably have been a domestic transaction. Besides that, cranbers, yes, this is a somewhat different matter.
What we don't know yet - and may perhaps learn more about from the SEC in coming days - are the identities of the departments from which Carty says managers transferred funds, and of those they were transferred to. Common sense would tell you these would be sales-related, and this would be during a time in which Dell didn't sell AMD-based systems. If the objectives to which the 8-K referred are sales numbers, then the motive for changing those figures may have been related to sales incentives. There's no identities yet, of course, though it's common practice and not illegal for a manufacturer to give a reseller rebates or incentives to sell or feature its products, which leads me to wonder whether Intel may yet be involved, if only incidentally.
-SF3
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Bye Bye Dell.
Lets watch your share price crash.
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"Bye Bye Dell."
Uh yea...don't hold your breath on that one. Actually you know, do hold your breath, we could use less idiotic postings around here anyway.
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If it looks like fraud and smells like fraud... Way to go Dell! Dude, you're getting defrauded!
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Dare I say it? ...Dude!
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Man do I loath this company, I hope they go tits up and Michael Dell shoots himself.
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You want a company to go bankrupt so there is less competition, and you want the head of that company to take his own life? Really...?
I'm not fan of Dell either, but my solution is pretty simple. I don't buy their products.
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Michael Dell is a serious POS.
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Your comments don't exactly make you much better... I agree with Alex-- when I dislike a company, I simply choose not to buy their products.
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Folks, just to clarify: It's very important to note that Michael Dell was not the CEO during the period in which these activities took place. The 8-K points a finger in the general direction of Kevin Rollins, who was the CEO at that time. Michael Dell was the chairman of the board, but often a chairman really does not have direct oversight over his company's business activities - that's what a CEO and CFO are for. So it is entirely possible that Michael Dell was not a party to any of this.
However, it's also noteworthy that he does not appear to have made any public comment. I would think that he'd almost have to, perhaps today, in order to restore shareholder confidence in both his company and his plausible deniability.
-SF3
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Not to say "I told you so" about Kevin, but--oh heck, I told you so :D
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I have other reasons for not liking Michael Dell that have nothing to do with his computers.
By the way, I condiser myself way above the likes of M Dell as his kind.
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