Dell has found evidence of misconduct in how it has managed its accounting. Trading in its shares were halted on the news yesterday afternoon.
It looks like Dell 1.0 will continue to be a distraction for the PC maker, and a burden for its shareholders, even as it seeks to reinvent itself and recapture its glory days following the return of Michael Dell in January.
The company told the markets that its audit committee has has identified a number of accounting errors, evidence of misconduct, and deficiencies in the financial control environment.
It did not specify during which period these errors were found, but the company has delayed the filing of its 10-K annual report for the year to February 2, 2007.
The firm also still hasn’t filed its third-quarter statement, and is facing Nasdaq delisting hearings. Dell disclosed that it was being investigated by the US Securities and Exchange Commission in November 2006.
While Dell has been coy about what the probe relates to, conventional wisdom has it that it is probably not related to the broad stock option accounting concerns facing US public companies. If it was, the company likely would have said so, seeking safety in numbers.
One reason has been touted. In December, Clay Sumner, an analyst at Friedman, Billings, Ramsey & Co suggested that Dell regularly uses warranty accruals to materially manage margins and earnings.
Essentially, he suggested that Dell may have under-estimated the future cost of delivering on product warranty commitments, in order to have fatter margins and higher earnings in the short term.
Sumner said Dell appeared to have been overstating gross margins by under-accruing warranties since the third quarter of 2003. He estimated that the company may have over-stated earnings by $0.02 to $0.08 per share in five quarters over three years.
That was partly on Michael Dell’s watch. He gave Kevin Rollins the CEO’s job in July 2004, before returning this year after Rollins had led the company into a few of bad quarters..
Rollins isn’t the only executive to have abruptly left Dell since the accounting investigation surfaced. Chief financial officer James Schneider was replaced by outsider Donald Carty in late December.
Dell has not disclosed which executives may be connected to the evidence of misconduct. It did say that it continues to investigate whether it will need to restate earnings and whether it has any weak internal financial controls.
The SEC investigation has been rolling since August 2005. Dell revealed its existence a year later, but said it was informal. It became formal in November 2006.