Dell Ordered To Pay 100 Million In Fines To S.e.c.

Dell took secret payments from Intel to keep AMD's chips out of Dell's machines. The SEC calls it "accounting irregularities" — Dell was dipping into
this secret slush fund to bolster its results, quarter by quarter. At one point the payments (PAYOFFS) from Intel made up 76% of Dell's quarterly
operating income.

THE spell has been broken. For years, Dell’s seemingly magical power to squeeze efficiencies out of its supply chain and drive down costs made it a darling
of the financial markets. Now it appears that the magic was at least partly the result of a huge financial illusion. On July 22nd Dell agreed to pay a $100m
penalty to settle allegations by America’s Securities and Exchange Commission (SEC) that, in the SEC’s words, the company had “manipulated its accounting
over an extended period to project financial results that the company wished it had achieved.” The company neither admitted nor denied guilt as part of the
settlement—a common phraseology in such deals. The penalty seems rather light given the gravity of the SEC’s accusations. According to the commission, Dell
would have missed analysts' earning expectations in every quarter between 2002 and 2006 were it not for accounting shenanigans. This involved a deal with
Intel, a big microchip-maker, under which Dell agreed to use Intel's central processing unit chips exclusively in its computers in return for a series of
undisclosed payments, locking out Advanced Micro Devices, a big rival. (Intel is expected to settle a long-running anti-trust case that has highlighted these
payments in the next couple of weeks.) The SEC's complaint said Dell had maintained “cookie-jar reserves” using Intel’s money that it could dip into to cover
any shortfalls in its operating results. The SEC says that the company should have disclosed to investors that it was drawing on these reserves, but did not.
And it claims that, at their peak, the exclusivity payments from Intel represented 76% of Dell’s quarterly operating income, which is a breathtaking figure.
Small wonder, then, that Dell found itself in a pickle when its quarterly earnings fell sharply in 2007 after it ended the arrangement with Intel. The SEC
alleges that Dell attributed the drop to an aggressive product-pricing strategy and higher than expected component prices, when the real reason was that the
payments from Intel had dried up.

A Tarnished Reputation

As well as a blow to Dell’s hitherto sparkling reputation, the settlement is also a severe embarrassment for Michael Dell, the firm’s eponymous founder and current
chief executive. He and Kevin Rollins, a former boss of the company, agreed to each pay a $4m penalty without admitting or denying the SEC’s allegations. Several
senior financial executives at Dell also incurred penalties. “Accuracy and completeness are the touchstones of public company disclosure under the federal securities
laws,” said Robert Khuzami of the SEC’s enforcement division when announcing the settlement deal. “Michael Dell and other senior Dell executives fell short of that
standard repeatedly over many years.” Mr Dell nevertheless looks set to keep his job. Sam Nunn, one of the directors on Dell’s board, said that it had reaffirmed its
unanimous support for Mr Dell’s continued leadership and welcomed the settlement which, it said, “is in the best interest of the company, its customers and its
shareholders.” In its statement on the SEC settlement the company played down Mr Dell's personal involvement, saying that his $4m penalty was not in connection with
the accounting-fraud charges being settled by the company, but was "limited to claims in which only negligence, and not fraudulent intent, is required to establish
liability, as well as secondary liability claims for other non-fraud charges." Welcome though the sanctions are, the episode will do little to convince investors that the
authorities can effectively deter managers from manipulating companies’ figures to their benefit. The complexity of corporate accounting offers plenty of possibilities
for manipulation that even eagle-eyed accounting firms can find tricky to uncover. Dipping into the cookie jar is a bad habit that is unlikely to be cured any time soon.
http://www.economist.../dellscookiejar