Dell fiddled its accounting in order to meet financial targets for four years, and will have to restate up to $150m of previously reported profit, the company has admitted.
The bogus accounting practices, which mainly relate to the timing of revenue recognition, started in 2003 and continued until the first quarter of this year, Dell said, reporting the results of a year-long internal investigation.
In some cases senior executives coordinated the accounting changes, or were at least aware of them, CFO Don Carty said on a conference call with analysts.
While former CEO Kevin Rollins was at the helm for most of the periods in question, some of the mismanaged quarters, such as in 2003, appear to have happened on Michael Dell’s watch.
Some staff have been fired as a result. Carty would not name them, nor would he say whether any of the guilty parties are still working at the company, despite being asked by analysts three times.
The company was coy on the details of precisely how the books were cooked, saying just that it involved adjustments to various reserve and accrued liability accounts at the end of quarters, in order to meet targets.
That is consistent with, but does not necessarily confirm, a December 2006 theory from Clay Sumner, an analyst at Friedman, Billings, Ramsey & Co, who suggested that Dell regularly uses warranty accruals to materially manage margins and earnings.
Remarkably, these adjustments appear to have carried on until as recently as this year, six months after Dell launched its investigation and 18 months after the Securities and Exchange Commission revealed it was looking at the company’s accounting.
The company said our previously issued financial statements for fiscal 2003, 2004, 2005 and 2006 (including the interim periods within those years), and the first quarter of fiscal 2007… should no longer be relied upon.
The probe uncovered only one incident of fraud, where revenue was fabricated outright, Carty said. The rest was related to the timing of actual revenue, so it will make it back to Dell’s earnings statements, if it has not already. There will be no balance sheet impact.
While the revelations are obviously very embarrassing – and the SEC investigation will likely produce at the very least some sort of settlement deal – the numbers involved are relatively small, which should be a source of relief for Dell investors.
Dell said the bogus adjustments were often several hundred thousand or several million dollars. This is pocket change for a company that has had an annual turnover of between $35bn and $56bn in revenue and profit of $2.1bn to $3.6bn over the last few years.
As a result of the misconduct, Carty said Dell will introduce better financial controls and will attempt to create a culture of fiscal responsibility at the company.
We’re going to focus our decision-making and processes on shareholder value creation over the long term, with a decreased focus on short term quarter-by-quarter operating results, Carty said.