Dell announced that its Audit Committee has completed its independent investigation into certain accounting and financial reporting matters. As a result of accounting errors and irregularities identified in that investigation and in additional reviews conducted by management, the Audit Committee has determined to restate the company’s financial statements relating to fiscal 2003, 2004, 2005 and 2006 (including the interim periods within those years) and the first quarter of fiscal 2007 (collectively the “restatement period”). Dell’s previously issued financial statements for those periods should no longer be relied upon.
Restatement
The
restatement will correct the accounting errors and irregularities that
have been identified through the Audit Committee investigation and by
management as a result of its additional reviews. The accounting errors
and irregularities that will be corrected are significant because of
the combination of the number of issues identified, the qualitative
nature of many of the issues, and in some cases, the dollar amounts
involved. Many of the adjustments offset each other during the
restatement period, and most relate to the timing of the recognition of
income and expenses. Consequently, the restatement is expected to have
the following effects:
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Scope of Investigation; Summary of Findings
The
investigation, which began August 2006, involved more than 375
professionals deployed across all the company’s major regions. The
investigation team evaluated more than five million documents,
conducted more than 200 interviews of company personnel and reviewed
thousands of journal entries and supporting documentation.
The investigation raised questions relating to numerous accounting issues, most of which involved adjustments to various reserve and accrued liability accounts. The investigation identified evidence that certain adjustments appear to have been motivated by the objective of attaining financial targets. According to the investigation, these activities typically occurred at the close of a quarter. The investigation found evidence that, in that timeframe, 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.
Identification of Control Deficiencies
As
a result of the investigation issues, as well as other issues
separately identified by management, current management has concluded
the company did not maintain an effective control environment,
including a tone and control consciousness that consistently emphasized
strict adherence to Generally Accepted Accounting Principles (GAAP). In
addition, current management has concluded that the company did not
maintain effective controls over the period-end reporting process,
including controls with respect to the review, supervision and
monitoring of accounting operations.
Management expects to conclude that these control deficiencies constituted material weaknesses in the company’s internal control over financial reporting. Management’s report on internal control over financial reporting will be included in our Fiscal 2007 10-K filing.
“The rigorous examination of our accounting and finance processes, along with the remedial actions taken and planned, have made and will continue to make Dell a far stronger company and provide a solid foundation on which to move the business forward, reinforce our standards and focus our energy on serving our customers,” said Donald J. Carty, Dell’s vice chairman and chief financial officer.
Remedial Action
In
response to the investigation’s findings, management has undertaken a
number of remedial actions that are in various stages of completion and
will continue to be implemented going forward. These actions are an
important step in the process of ensuring confidence in leadership and
financial reporting and focus on these areas:
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Mr. Carty said that management is working with the Audit Committee to develop a detailed plan and timetable for the full implementation of remedial actions and will provide regular updates to the committee.
“We are committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity,” said Michael Dell, chairman and CEO. “This commitment will be communicated to every Dell employee and external stakeholder. It is accompanied by renewed management focus on decision-making and processes intended to drive long-term shareholder value.”
Ongoing SEC Investigation
As
previously disclosed, the Audit Committee investigation began as a
result of concerns raised by documents and information discovered in
the course of responding to requests from the Enforcement Division of
the U.S. Securities and Exchange Commission (the “SEC”) in connection
with an investigation into certain of our accounting and financial
reporting practices. While the restatement will address all of the
issues identified in the Audit Committee investigation and in the
additional reviews conducted by management, the SEC’s investigation is
ongoing, and there can be no assurance that there will not be
additional issues or matters arising from that investigation.
