Dell Admits Fraud in Financial Reporting, Will Restate Earnings Since 2003

In an historic admission of culpability, Dell Computer this afternoon announced that its internal review of accounting practices dating back to its 2003 fiscal year turned up evidence of senior executives having adjusted its balance sheets in order for the company to meet specific financial goals.

This admission, if validated by the US Securities and Exchange Commission which is also investigating Dell, would go way beyond the initial subject matter of the accounting scandal. That investigation looked into whether the issuance of backdated stock options to senior executives was intentionally not reported on the company's balance sheets as expenses.

Now, the admission made by Dell's new financial team - led by new Vice Chairman and CFO Don J. Carty, appointed last December - acknowledges what can only be described legally as fraud, though Carty carefully refrained from referring to it as such during a hastily-arranged conference call Thursday afternoon.

"Obviously if you recognize revenue inappropriately, it was inappropriate," responded Carty to a direct question from one analyst about whether the activity the internal review turned up, constituted fraud.

In the company's long-delayed 8-K report to the SEC, issued just this afternoon, the company made the following admission:

"The investigation found evidence that, in that timeframe [between fiscal 2003 and 2006], account balances were reviewed, sometimes at the request or with the knowledge of senior executives, with the goal of seeking adjustments so that quarterly performance objectives could be met. The investigation concluded that 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, as well as the transfer of excess accruals from one liability account to another and the use of the excess balances to offset unrelated expenses in later periods. The investigation found that sometimes business unit personnel did not provide complete information to corporate headquarters and, in a number of instances, purposefully incorrect or incomplete information about these activities was provided to internal or external auditors."

As the 8-K report described, much of this activity consisted of moving money from one account to help pad another. As a result, the actual amount of the restatement of earnings may actually not be very large - perhaps less than 1% of the company's earnings for each of the four fiscal years in question. But Carty's statements implied that the amount of the actual misstatements could be much larger than this 1%, though the solution may simply be to move the imbalanced figures back to the departments where they belong, for what is being called reversibility.

"That some of these things are reversing themselves, I think, doesn't obviate the fact that we had serious control deficiencies," Carty said today. "That should not have happened. But I think you can see by the fact that, in the end, we don't have a significant financial impact on our cumulative [profit and loss], we don't have one on the balance sheet, suggests that most of this reverses itself."

The 8-K report tried to frame the extent of these improper adjustments of just a meager few thousand or million here and there, in the context of a company that reaped tens of millions in revenue. "Nevertheless, the errors and irregularities identified in the course of the investigation revealed deficiencies in our accounting and financial control environment that require corrective and remedial actions," the 8-K report went on.

However, Carty was forced to admit today the existence of a single overseas transaction that could not be reversed by simply shifting balances back. The identity of that transaction and the parties involved, besides Dell, could not yet be revealed, he said.

Some of those remedial actions have already been taken, Carty said this afternoon. Without naming names, he implied that all participants in this scheme are no longer Dell employees. One noteworthy former Dell employee whose name did not emerge in conversation is Kevin Rollins, who resigned as CEO last January to be replaced by company founder and former CEO Michael Dell. Another is Jim Schneider, the company's former chief financial officer, whom Carty replaced in January. Their departure from the company was described in the 8-K report as part of its remedial action, "both to address the identified control deficiencies and to enhance our overall financial control environment."

"This is not a happy story for Dell, nor one that we're terribly proud of," Carty concluded today, "but I do think this rigorous examination of our accounting and financial reporting processes, along with the remedial actions, have made and will continue to make Dell a far stronger company, and it will definitely provide a solid foundation in which we're able to move our business forward, and we absolutely want to move our business forward."

For more: The Dell Debacle: How Serious is the Damage?

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