September 12, 2006
Accounting Investigation of Dell Gets a Lot More Serious
It is a tough time for leading computer companies, with the government investigation of Hewlett-Packard's use of possibly illegal methods to gather private information about its board members and now Dell's disclosure that it will not be able to file its financial statements due to continuing accounting problems. Dell disclosed in August (8-K here) that the SEC had initiated an informal investigation of its accounting "relating to revenue recognition and other accounting and financial reporting matters for certain past fiscal years . . . ." The company soft-peddled the inquiry, burying it in a press release that championed its second quarter results. The disclosure of the informal inquiry came a number of months after the SEC contacted the company. Now comes another Dell 8-K (here) with the news that the U.S. Attorney's Office for the Southern District of New York has subpoenaed the company in connection with its accounting, and that the issues will affect prior years. Taking the same approach that seems to discount the investigation, Dell states that "[t]he SEC requests for information have been joined by a similar request from the United States Attorney for the Southern District of New York, who has subpoenaed documents related to the company’s financial reporting from 2002 to the present."
While one can describe a grand jury subpoena as a "request" from the Department of Justice, subpoenas are a bit more than just a casual missive sent when prosecutors have nothing better to do. Moreover, the fact that federal prosecutors from the Southern District are now involved in the case means it is a much greater threat to the company, and perhaps to individual officers. If any executives on the financial side of Dell suddenly resign, that is a good sign that the criminal investigation has advanced and is targeting individuals. Unlike the Hewlett-Packard investigation, which is unrelated to the company's core business, this investigation goes to the propriety of Dell's financial reporting, a key issue for investors and regulators. (ph)
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