Dell promises to restate fudged accounts

Texas-based PC manufacturer Dell has been forced to restate accounts going back to 2003 due to accounting errors and irregularities identified by an internal investigation.

The accounting errors and irregularities that will be corrected are significant because of the combination of the number of issues identified, the qualitative nature of many of the issues, and in some cases, the dollar amounts involved.

The problems came to light in 2005, when the SEC's Division of Enforcement launched an investigation into the company's accounting and financial reporting practices. As the investigation intensified, Dell's audit committee turned to law firm Willkie Farr & Gallagher and KPMG to help it identify any underlying irregularities.

Dell's internal review identified questionable adjustments to various reserve and accrued liability accounts, which typically occurred towards the end of quarterly reporting periods. The investigators found evidence that "certain adjustments appear to have been motivated by the objective of attaining financial targets." In some cases, the adjustments amounted to several hundred thousand or several million dollars.

Account balances were often reviewed at the end of the accounting period to identify adjustments that could help executives hit quarterly performance targets. "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," Dell admitted in an 8-K report filed with the SEC.

According to Dell's statement to the SEC, the impact of each of the restatements is expected to amount to less than 1 percent of the amount previously reported for each of the years affected. The cumulative change is likely to be a $50-$150 million reduction in reported profits. The worst affected period was Q2 of 2004, which was expected to see a 13 percent reduction in profits, followed by Q1 2003, which was expected to show a 10 percent drop.

"The adjustments are not expected to have a material impact on the current balance sheet," the company said, adding that assets and liabilities were each expected to be adjusted by 1 percent or less. Ironically, while shares tumbled elsewhere, Dell's price on NASDAQ rose by more than 1 percent after the SEC filing was announced.

In an extended mea culpa issued alongside the 8-K, Dell admitted to weaknesses in its internal controls and promised to implement a number of remedial actions to redress this. Financial leaders within the company will be required to take comprehensive training on accounting standards and policies, and a number of terminations, reprimands, reassignments and fines would be instituted on internal staff.

Dell is also reorganizing its finance function to segregate accounting and financial reporting from planning and forecasting.

KPMG identified many of the dubious adjustments by analyzing Dell's ledgers with a program that highlighted journal entries involving large, round numbers - typically between $3 million and $50 million, As a result, "efforts are underway to enhance and improve internal controls around journal entry processes," the company explained. New applications are being implemented to eliminate manual processes and improve the reliability of financial reporting.

"We are committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity," said Dell chairman and CEO Michael Dell. "This commitment will be communicated to every Dell employee and external stakeholder. It is accompanied by renewed management focus on decision-making and processes intended to drive long-term shareholder value."

While the restatement and remedial actions were welcomed by investors, the SEC is continuing with its investigation. "There can be no assurance that there will not be additional issues or matters arising from that investigation," Dell said.

By John Stokdyk, for our sister site, accountingweb.co.uk.

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