Jan 12, 2018 in Analysis

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In 2007 Dell Inc was investigated by Securities and Exchange Commission (SEC) over conflicting accounting principle related to revenue recognition and financial reporting. The informal investigations of Dell’s accounting policies came as a result of audit inspections conducted by the newly formed Public Company Accounting Oversight Board (PCAOB). During the investigation Dell announced that a US attorney had subpoenaed scores of documents dating back to 2002 (Sandretto, 2011). In 2010 investigations found out that Dell did not disclose payments the company received from chipmaker Intel for using its products rather than chips from rival company AMD (Advanced Micro Devices). The company manipulated its accounting over an extended period to indicate that the financial results the directors wished they had received (Sandretto, 2011).

Dell’s fiscal year 2011 highlights indicated that the company’s revenue grew by 16% to $61.5 billion. During the same period GAAP operating income grew 58% to $3.4 billion which was estimated at 5.6% of revenue. Non-GAAP operating income grew to 40% to $4.1 billion estimated at 6.7% of revenue. In the fiscal year 2012 the company marked the best financial performance in its history. Dell’s revenue grew by 1% up to $62.1 billion from the previous fiscal year 2011. The GAAP operating income climbed 29% to 4.4 billion estimated at 7.1% of revenue while on the other hand non-GAAP operating income rose 24% to $5.1 billion estimated at 8.3% of revenue.

The SECs allegations in regards to Dell Inc were directed to various departments within the company. The departments directly involved include; financial services, supplies and procurement department. The weakness of the finance department was failure to disclose violations and improper accounting. Corporate strategy and business development took part in concealing the information (Reynolds, 2011). The two departments failed to disclose material information to investors and for fraudulent accounting.

The finance department at Dell Inc made misleading statements about the company’s financial results and prospects that artificially boosted the stock price. The supplies and procurement department was alleged to have sold off large portions of their stock before bad news about the company’s financial status became public knowledge. Finance department was involved in restatements from 2003 through 2006 ranging from $30million to $91 million per year (Reynolds, 2011). Many of the restatements were as a result of misuse of reserve accounts and accrued liabilities with the appearance that such errors were motivated by executives trying to reach financial targets. 

Because of failures of corporate governance and managerial responsibility, Dell had to admit that their financial statements for more than four years could not be relied upon. Nikolai, Bazley & Jones (2009) recommended that the cumulative adjustments required correcting the errors and irregularities in the financial statements prior to fiscal year 2005 and be reflected in the restated earnings as of the end of fiscal year 2004. The cumulative effect of those adjustments would have reduced retained earnings by $52 million at January 31, 2004. Nikolai, Bazley & Jones (2009) further recommended that Dell Inc adjusts the financial statements of each prior period to reflect the specific effects correcting the error. Each item in each financial statement that is affected by the error is restated to the appropriate amount.

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