Dell reveals it manipulated its books
Dell Inc. said Thursday that it fired and reassigned some employees, instituted stricter controls and planned to restate past financial results by as much as $150 million after an internal investigation found the computer maker had manipulated numbers to hit performance targets.
The scandal has dogged Dell and cast doubt on its financial reports ever since the company disclosed last year that the Securities and Exchange Commission was investigating its accounting practices.
Dell, based in Round Rock, Texas, said the restatement would knock $50 million to $150 million from the more than $12 billion in profit the company has reported over the last four fiscal years.
“This has been a difficult period for our company and employees,” said Donald Carty, Dell’s chief financial officer.
But analysts and investors who had feared much worse breathed a sigh of relief. Dell shares fell 37 cents to $25.93 in regular trading, then gained 53 cents to $26.46 after the announcement.
“This falls on the lower rungs of what could be a problem,” said Chuck Ross, a criminal defense lawyer at the New York law firm Charles A. Ross & Associates. “My bet is that the SEC does not sue Dell and doesn’t bring regulatory action” against it.
Others are less sure.
“It’s a scary indication that there could be more out there,” said Craig Siiro, a forensic accountant at Virchow Krause & Co. “What would concern me is that they didn’t find it internally, and they needed the SEC to say something goofy is going on there.”
The results of the internal investigation, overseen by Dell’s audit committee, were released at a time when Dell was trying to regain its footing amid turmoil.
The company last year ceded the top spot in global personal computer sales to Hewlett-Packard Co. Kevin Rollins stepped down as chief executive in January and Michael Dell, who founded the company in his college dorm room in 1984, returned to the helm.
HP demonstrated its clout Thursday in reporting another quarter that surpassed analysts’ expectations. The Palo Alto-based company said its fiscal third-quarter profit rose 37% to $1.8 billion, or 66 cents a share. Revenue was up 16% to $25.4 billion on strong sales of computers and printer supplies.
HP shares fell 10 cents to $46.06 before the report, then gained 40 cents after hours.
Dell said it found evidence that employees, sometimes at the behest or with the knowledge of senior executives, had improperly boosted financial results for their units to meet quarterly performance objectives.
The internal audit painted a picture of a company that for years understated revenue for some quarters and overstated it for others. The practice, known as “smoothing,” helps companies better predict earnings, meet Wall Street’s expectations and protect the stock from volatility. But it violates accounting rules because investors “are seeing a different picture than what really happened to the company,” Siiro said.
During a conference call, analysts pressed Dell executives to identify the senior executives who knew about the practices or promoted them. Carty declined but said the company was changing its accounting practices and beefing up its controls.
“The leadership team of the company and the board absolutely think we have taken necessary remedial actions,” he said.
He said the restatement would reduce revenue by an average of 1% a quarter during the related period, but that the restatement would not have a “material effect” on the company’s bottom line.
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