Dell Talking Again After Audit

More than four years of intentionally mistated results will cost the computer maker millions. Says one exec: "This is not a happy story"

by Aaron Ricadela

Dell (DELL) shareholders had been investing under a cloud of uncertainty for a year as the world's No. 2 PC maker conducted an accounting probe that choked off the flow of information. The struggling computer maker hadn't held a quarterly conference call in 12 months, executives were absent from the speaking circuit, and investors were wondering whether the company's current management team would emerge unscathed.

On Aug. 16, Dell reopened the tap. After an extensive audit, Dell concluded that finance staff, including senior managers, intentionally misstated results and misled auditors for more than four years to make it look as if Dell had performed better than it did. As a result, the company will restate results for fiscal years 2003 through 2006 and the first quarter of 2007, reducing net income by $50 million to $150 million, or 2 cents to 7 cents a share for the span. Reported revenue will likely drop 1%.

In an Aug. 16 filing with the Securities & Exchange Commission, Dell described an environment of systematic deceit, with employees recording false balance sheet items and other accounting entries for hundreds of thousands or millions of dollars. Dell said senior executives at the company had asked employees to change account balances—usually at the close of a quarter—so the company could meet financial performance goals. Finance employees created false bookkeeping entries, gave incomplete information to headquarters, and falsified information given to Dell's auditors, PricewaterhouseCoopers. In the case of one foreign transaction, "We did find evidence of fraud," Chief Financial Officer Donald Carty said in a conference call with investors. "This has been a very difficult and arduous road for the company," Carty said. "This is not a happy story."

Risk Lessens for Investors

Still, Dell is determined to commence the current chapter on a high note. A Dell spokeswoman opened the conference call with the news that company founder and Chief Executive Officer Michael Dell will speak at a Citigroup (C) technology conference in New York on Sept. 5. The affirmation of Dell's command, combined with the promise of a return to quarterly earnings calls and the relatively small amount of lost profits—Dell earned more than $12 billion during the period covered by the restatement—will give investors more transparency and could be cause for relief, says Brent Bracelin, a vice-president and senior research analyst at Pacific Crest Securities. "They want to send a message that Michael Dell is still part of the future of the company," Bracelin says. "That's the biggest question mark out there."

Added information may not include quarterly forecasts, Dell indicated. During the call, Carty pointed to a "decreased focus on short-term, quarter-by-quarter operating results" as part of the fallout from the misstatements. But the end of Dell's internal investigation will at least let investors—and Dell management—concentrate on how to generate future sales growth and profits, Bracelin says. "For the first time in a year, we have a quantification of what the impact will be," he says. "As an owner of Dell six months ago, you actually had more risk than you do today."