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Dell Re-states Earnings, Reveals More Fraud Details
Edward F. Moltzen
The Round Rock, Texas-based computer maker also said it uncovered problems with its warranty accounting, and that its earnings over several-year period were less than had been publicly reported.
"The cumulative change to net income for the restatement period was a reduction of $92 million, compared to previously reported net income of more than $12 billion for the period," a Dell spokesman said in a separate statement. "This represents less than one percent of the total net income during this period. The cumulative change to earnings per share (EPS) for the restatement period was 3 cents ($0.03) compared to the previously reported cumulative $4.78."
The periods involved included quarters from 2003, 2004, 2005 and 2006.
While the net adjustment of reported earnings was small in comparison to Dell's overall revenue and profit, the timing of the incorrect accounting in some instances served to help the company meet or exceed Wall Street's quarterly expectations. The company had previously acknowledged misconduct by some unnamed executives, and on Tuesday revealed a scheme that had taken place in its operations in Japan.
"In late January 2007, a Japanese systems integrator with whom Dell's Japanese services division did business, filed for bankruptcy. The bankruptcy trustee publicly indicated that the systems integrator had engaged in fictitious transactions," Dell reported in its filing with the SEC. "Dell promptly commenced an internal investigation led by Dell's Ethics Office to determine whether its Japanese business unit had engaged in any fictitious transactions with the systems integrator.
"Dell hired independent outside counsel who retained independent accountants to lead the investigation," Dell wrote. "The investigation determined that almost all of the transactions of the Japan services business involving the systems integrator were likely fabricated, as were certain additional smaller transactions involving two other Japanese systems integrators. The impact of the adjustments reduced net revenue and cost of revenue to eliminate the effect of the fictitious transactions."
Dell also said it uncovered problems with its warranty accounting, "where certain vendor reimbursement agreements were incorrectly accounted for as a reduction in the estimate of outstanding warranty liabilities."
The company first publicly revealed its problems in August, 2006, saying the SEC had begun an "informal investigation" a year earlier into undisclosed issues. Within a month, the company announced it would not be able to file its mandatory quarterly reports. By the end of the year, Dell's long-time CFO James Schneider quit along with several other top executives. In January, CEO Kevin Rollins was ousted and Dell founder and chairman Michael Dell re-assumed the CEO position.
In August, Dell announced that a probe by the Audit Committee of its board of directors had found misconduct, determined that an earnings restatement would be needed, and said the company was in the midst of restructuring its organization. Some of those involved in misconduct were fired, some were counseled and had other action taken, Dell said. While the company has minimized the dollar value of the accounting fraud, in its SEC filings Tuesday, as in August, the company suggested timing was key.
"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," Dell said in its SEC filing. "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."
Dell has been working feverishly to turn this page in its chapter, start growing its business and profitability after two years of sluggishness, and change its business model. Among other things, Dell, the once-direct-only company says it will expand its engagement with the channel and boost its retail presence. There has been ample skepticism in the channel, while Dell works toward what it says will be a new, formal program for VARs by year's end.
In addition to filing the delinquent reports, Dell says it will post its next quarterly earnings results on Nov. 29, and -- for the first time in a year -- take questions from analysts and reporters on its business and its strategy in a conference call after the announcement.
Dell has previously said the SEC and U.S. Attorney for the Southern District of New York had launched their own investigations into Dell's accounting, but there was no immediate update on the status of those probes.