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SEC Complaint Against

Dell Inc.
Presented By: William Grow

c
Background on Dell

c Founded in 1984 by Michael S. Dell.

c Offers customers many products including:


c Personal computers
c Software and peripherals
c Servers and networking
c Storage devices.

c Other Services include:


c Configurable information technologies for businesses
c Infrastructure technologies
c Consulting applications
c Business process services
Securities & Exchange
Commission

c Hold responsibility for enforcing federal securities laws and


regulating the securities industry and stock market in the US

c Regulate the stock market and prevents corporate abuses relating


to the offering and sale of securities and corporate reporting

c Congress allows the SEC to bring civil enforcement actions


against individuals or companies who have:
c Committed accounting fraud
c Provided false info
c Engaged in insider trading
vhe SEC Complaint

c Filed on July 22, 2010 under Accounting and Auditing


Enforcement Release No. 3156

c Charged Dell with D 



  
 

 
  
   
  
 
 

   

 
   
 
 


Dell·s Non-Disclosure of
Financial Information

c Dell failed to disclose the receipt of large payments from


Intel Corporation in the form of rebates
c Payments were in exchange for agreeing to exclusively
purchase central processing units from Intel and not from
Advanced Micro Devices Incorporated (AMD)
c vhe fact that the payments were not disclosed on Dell·s
financial statements fraudulently misrepresented the basis
for Dell·s improving profitability
vhe Nondisclosure Quickly Got
Out of Hand«

c Shareholders had no idea that the rebate program existed at


the level that it did

c Intel began increasing the amount of rebates that they were


awarding Dell to hundreds of millions of dollars each year
to persuade Dell from taking their business elsewhere

c By 2004 Dell was relying solely on the payments to meet


their quarterly EPS goals
Why Such a Problem?

c Since payments were not disclosed in the financial


statements investors and shareholders were gauging the
company·s growing profitability on the wrong factors.
c Over a 5 year period payments from Intel allowed Dell to
drive profits and meet Wall Street EPS targets.

c vhis led investors to believe that it was Dell·s own


management and operations that allowed earning targets to
be met, when in fact it was the Intel payments
Misstated Income Statement

c On Dell·s income statement they treated the


rebates as decreases in costs of good sold
c vhe rebates should actually have been recorded as
a reduction in operating expenses.
c By decreasing COGS Dell was able to show a
higher gross margin, which looks more appealing
to investors than lower operating expenses.
Other Misstatements

c On the Management Discussion and Analysis of Financial


Condition and Results of Operations (MD&A) section of
Dell's 10Ks, many materially misleading statements were
published

c MD&A·sprovide investors an opportunity to look at the


company through the eyes of management

c According to the SEC complaint, Dell's materially


misleading MD&A disclosures defeated the entire purpose
of the MD&A since they did not fully disclose Dell's results
of operations and the basis for its success
Dell·s Repercussions

c varnished public image

c Paid a $100 million penalty to settle the charges

c CEO Michael Dell and former CEO Kevin Rollins


each had to pay a $4 million penalty
c Former CFO James Schneider paid $3 million
dollar penalty
In Relation to Strategic
Management«

c As a manager it is important to make ethically


sound decisions
c vhe ethical decision often times may not be the
most profitable
c Prime example of how easily management can be
swayed to please investors

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