Friday, February 02, 2007

Dell, Accounting Scandal and Investor Lawsuit

It was not long after Kevin Rollins was fired a day ago (well ok, resigned), that Dell investors filed a lawsuit against the computer maker's accounting practices in its longtime partnership with chipmaker Intel.

  • Dell's deal with Intel
    • Dell has been receiving 'rebates' from Intel for a long time every year to the order of $1 billion per year
    • Agreement was to use only Intel chips in Dell computers, (and not AMD's)
    • Intel had urged Dell to keep this deal secret to due to fear of antitrust lawsuits (unfair competition) against Intel across the world
    • So, the deal was maintained secret, known only to 15 senior people within the organization
    • And we know, anything "secret" in a public company, is "likely illegal"
  • Lawsuit -
    • Seeks class-action status on behalf of Dell shareholders
    • Filed here in Austin
    • The 'rebates' that Dell received are termed 'e-cap payments' (exception to corporate average pricing)
    • Fraudulent accounting - Dell's profits have been reported inflated by hundreds of millions of dollars
    • The $1 billion a year that Dell received was spread 'unevenly' across the 4 quarters, and the money was applied to reduce COGS (cost of goods sold) on the Income Statement - (Intel must be cursing Dell for this). In other words, they recognize this revenue as and when they want, depending on their quarter's performance. This is not conformant with US GAAP.
    • More, since 1999, Dell started making computers with AMD chips, again "secretly" - because the deal with Intel was still on - I seriously don't know how they got away w/ this.
  • AMD vs Intel
    • vigorously competing against each other for market share - with AMD doing better in the recent run
    • With this investor lawsuit against Dell, AMD jumps to the occasion and sues Intel for unfair marketing practices - I totally agree, this is an unethical fight for monopoly which is illegal under the antitrust regulation. Even if Intel gets away with this at U.S, I'm sure the EU will not tolerate that

  • So, now what?
    • Huge reputation damage for both Dell and Intel. More for Dell because, fraudulent accounting practices are far more illegal than antitrust.
    • PWC is Dell's defendant (Remember what happened to Arthur Anderson after the Enron drama?)
    • If I were working at Dell, I would have considered quitting, not because of the dropping share price or losing market share but just because the top management had a secret deal going on without letting the shareholders and employees know about it.



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5:28 AM  

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