Dell To Restate Earnings, Reveals Accounting Troubles

The restatements stemmed from a yearlong investigation by Dell's audit committee, which found evidence of accounting adjustments that appeared to have been made to hit financial targets.
Dell on Thursday said it would restate several years of financial results due to improper accounting that was apparently used by previous management at the close of quarters to hit financial targets.

The computer maker, which is under investigation by the Securities and Exchange Commission, said in a statement that it would restate its financials for fiscal 2003 through fiscal 2006, and for the first quarter of fiscal 2007. Most of the changes to the statements were related to the timing of the recognition of income and expenses.

As a result, net revenue for each annual period would be reduced by less than 1%. Net income for the total period would be reduced by between $50 million and $150 million, resulting in a drop in earnings per share of between 2 cents and 7 cents. For the entire restatement period, Dell reported a total of more than $12 billion in net income, or $4.78 per share.

Total assets and liabilities for the restatement period were expected to each increase by about 1%. No material impact was expected on cash flows for the period, or on current balance sheets, the company said.

The restatements stemmed from a yearlong investigation by Dell's audit committee, which found evidence of accounting adjustments that appeared to have been made to hit financial targets. The changes typically occurred at the close of a quarter, and were sometimes done with the knowledge or at the request of senior executives.

In addition, the panel found that business unit employees would sometimes provide incomplete information to corporate headquarters. In a number of instances, purposely incorrect or incomplete information about these activities were given to internal or external auditors.

In a teleconference with financial analysts, Dell Chief Financial Officer Donald Carty said most of the adjustments were to various reserve and accrued liability accounts. Most of the changes, however, were corrected in subsequent quarters, which is why the overall financial impact was not greater. Carty said investigators did find one instance of what appeared to be fraud in an overseas operation. As a result, the company suffered the full financial impact. He did not give details.

Carty was asked several times whether there was a possibility of a shake up among senior executives as a result of the committee's findings. While not giving a definitive yes or no, Carty seemed to indicate that the worst was over. "Let me assure you that both the leadership of the company and the board feel that we have taken the [necessary] remedial action," he said.

In promising that controls would be put in place to catch future accounting irregularities, Carty acknowledged that the company hadn't spent enough on information technology to help with financial reporting. He expected more money would be spent to correct the shortcoming and to help avoid future embarrassments. "This is not a happy story for Dell, and one that we're not terribly proud of," he said.

In its statement, the company acknowledged that it failed to "maintain an effective control environment, including a tone and control consciousness that consistently emphasized strict adherence to generally accepted accounting principles (GAAP)." Michael Dell, chairman and chief executive, said the company was fixing the system.

"We are committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity," Dell said in a statement. "This commitment will be communicated to every Dell employee and external stakeholder."

The company said it is in the process of reorganizing its financial operations, segregating accounting and financial reporting responsibility from planning and forecasting to ensure increased independence. In addition, the position of chief accounting officer has been strengthened, making it directly responsible for all accounting and financial reporting functions worldwide.

Because of the ongoing SEC probe, the company said it couldn't guarantee there wouldn't be "additional issues or matters arising from the investigation."

Dell executive Kevin Rollins quit in January following an 18-month stretch of slowing sales and profits that led to Dell steadily losing global market share to rival Hewlett-Packard. Michael Dell took over as CEO following Rollins departure.

In a memo sent to employees in early February, CEO Dell said he had suspended bonuses for the most senior executives, with lower employees getting awards on a case-by-case basis. Dell also said he would trim the number of top managers reporting directly to the CEO in an attempt to streamline operations.

Late last year, James Schneider, chief financial officer, left the company as the company faced an SEC investigation into its finances. Former American Airlines chief Carty replaced Schneider.

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