Thursday, August 16, 2007

More problems at Dell....

Dell, the world's second largest PC maker based at Round Rock, TX, said today that it has to restate its last 4 years of financial results due to potential manipulation. It expects the restatement to reduce the net income by around $150 M, which is actually not much when compared to the $12 B that it made during this same restatement period. Revenues would also reduce by 1%. So the changes are minimal, but nevertheless their reporting problems continue. The review identified evidence that certain manpluations and adjustments seem to have been motivated by the objective of attaining financial targets.

This is the common reason behind most cases of earnings manipulation, and we know that Dell still faces SEC investigations for prior misconduct. In the in-process audit that began in August 2006 after similar accounting problems, around 125 lawyers and 250 accountants reviewed more thab 5M documents (that's big!!) and conducted more than 200 interviews with the company employees.

We've noticed a lot of changes since then, with the most prominent ones being -

- Michael Dell returned as Chief Executive in January, replacing his protege Kevin Rollins
- They recently broke from their long successful direct-to-consumer sale strategy and have started selling their computers at Wal-Mart. This actually disturbs me a little. Dell, being based at Austin, TX, used to find its way into almost all our business school case studies, be it Information Mangement, or Operations, or Strategy, or even Finance (well, nowadays, it can start featuring in the Accounting classes as well, on how NOT to do accounting :-) ). And in almost every class that I've attended we've discussed the direct-sales model of Dell. I envy the future generations who don't have to go through that trauma anymore. Nevertheless, they still remain our biggest recruiter at UT, absorbing more than 25 interns on a consistent basis...

But, what's the future of Dell? Well, I guess they really have to find their way out of the labyrinth of improper accounting that they are in now and regain confidence among the customers, shareholders and employees. I will think twice before I buy a Dell PC, think 5 times before I invest in the company and think 10 times before I decide I want to work for the company. No, don't get me wrong, I like the company, Michael's a great founder and CEO and I'm sure he's already turning things around for the company, but yet, they have to straighten themselves a bit - they are lucky to get away with this mal-reporting as they have to restate only a small percentage this time, but.....



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