Friday, August 17, 2007

Dell Finds Its Accounting Problems

Computer giant Dell Inc. completed its internal investigation and discovered that it engaged in some "cookie jar" accounting to make sure it made its numbers.  In an 8-K (here), the company stated:

The investigation raised questions relating to numerous accounting issues, most of which involved adjustments to various reserve and accrued liability accounts, and identified evidence that certain adjustments appear to have been motivated by the objective of attaining financial targets. According to the investigation, these activities typically occurred in the days immediately following the end of a quarter, when the accounting books were being closed and the results of the quarter were being compiled. The investigation found evidence that, in that timeframe, 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.

The restatement of the company's financials will result in a hit of between $50 million and $150 million to its earnings for prior years.  Dell is quick to point out the relatively small amounts involved compared to its revenues and earnings during the years in question: "Often, these adjustments were several hundred thousand or several million dollars, in the context of a company with annual revenue of between $35 billion and $56 billion and annual net income of between $2.1 billion and $3.6 billion for the periods in question."  Of course, it's that last penny or two of earnings that makes all the difference to Wall Street, which wants to see the quarterly number hit every time, or the stock price gets hammered.

Dell disclosed earlier that the SEC is conducting a formal investigation of its accounting, and the restatement is not necessarily the end of the matter.  As it noted in its filing, "While the restatement will address all of the issues identified in the Audit Committee investigation and in the additional reviews conducted by management, the SEC’s investigation is ongoing, and there can be no assurance that there will not be additional issues or matters arising from that investigation." (ph)

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