Wall Street Beat: Dell Case Serves As Cautionary Tale

Sometime in the second quarter of 2004, Dell Chief Financial Officer James Schneider was told by the company's EMEA (Europe, Middle East and Asia) financial director that the unit was having difficulty meeting its US$159 million operating income target.

By Marc Ferranti
Thu, July 29, 2010

IDG News Service — Sometime in the second quarter of 2004, Dell (DELL) Chief Financial Officer James Schneider was told by the company's EMEA (Europe, Middle East and Asia) financial director that the unit was having difficulty meeting its US$159 million operating income target.

"[W]e need $175m," Schneider replied. "You need to tell me how we will get it. I suggest you not be too proud and see what [D]unning has socked away."

Schneider was referring to "cookie jar" reserves overseen by Nicholas Dunning, who at the time was vice president of marketing for Dell's EMEA Home & Small Business unit, according to an exchange recounted in a complaint filed last week in U.S. District Court by the Securities and Exchange Commission.

The unit reported eight quarters in a row of increasing operating income, but without the reserve, EMEA's operating income would have dropped by about 12.5 percent from the prior quarter, according to the SEC.

That scenario was just one of many accounts of alleged misleading financial practices by Dell that were outlined in the SEC complaint. Coming out in the middle of an earnings season in which IT vendors are bouncing back from recession, the complaint serves as a cautionary tale that a company's ability to meet financial targets quarter after quarter may be an illusion, created under pressure to conform to expectations for smoothly increasing earnings.

Headlines about the complaint and the proposed settlement -- which calls for Dell to pay $100 million and for five company officers including founder Michael Dell to separately pay varying amounts and settle charges -- have centered on the SEC's allegations about payments Intel (INTC) made to ensure the PC maker continued to boycott AMD (AMD) chips. As part of the settlement, Dell has admitted to no wrongdoing.

From the first quarter of the 2003 financial year through the first quarter of the 2007 financial year, Intel payments and rebates to Dell through a so-called Meet Competition Request program totaled $4.3 billion, eventually accounting for a whopping 76 percent of the company's operating income, the SEC said.

But beyond the Intel payments, the SEC's account of how Dell used the so-called cookie jar accounts reads like a textbook explanation of some of the accounting manipulations most frequently used by companies desperate to make quarterly estimates.

Dell, after getting wind of the SEC's inquiry, announced in 2007 that it was moving on its own to review accounting procedures and restate financial reports. It acknowledged misstatements, but the SEC goes into much more detail.

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