ROUND ROCK, Texas----Dell NASDAQ:DELL today 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:
-
Net revenue for each annual period is expected to be reduced by less
than 1 percent of the previously reported revenue for the period.
-
The cumulative change to net income for the restatement period is
expected to be a reduction of between $50 million and $150 million
compared to previously reported net income of more than $12 billion
for the restatement period, and the cumulative change to earnings per
share EPS for the restatement period is expected to be a reduction
of $0.02 to $0.07 compared to previously reported EPS of $4.78 over
the restatement period. Most of these reductions relate to the timing
of net income that would or will be recognized in periods before and
after the restatement period.
-
The largest percentage changes in quarterly net income and EPS are
expected to be in the first quarter of fiscal 2003 and the second
quarter of fiscal 2004, each with expected reductions of between 10
percent and 13 percent; the fourth quarter of fiscal 2005, with an
expected reduction of approximately 7 percent; and the second quarter
of fiscal 2005 and the third and fourth quarters of fiscal 2006, each
with an expected increase of approximately 5 percent to 7 percent. Net
income and EPS for each of the other quarters are expected to change
by 5 percent or less.
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The adjustments are not expected to have a material impact on the
current balance sheet. Adjustments to the annual periods are expected
to increase total assets by 1 percent or less and increase total
liabilities by approximately 1 percent. The opening balance sheet for
fiscal 2003 will include a cumulative adjustment to retained earnings
reflecting principally the shift of net income from the restatement
period into periods prior to fiscal 2003.
-
The adjustments are not expected to have a material impact on cash
flows during the restatement period and are not expected to have a
significant effect on the reported results of future operations.
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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Leadership -- Direct and appropriate leadership and messaging
to ensure a strong control environment and appropriate focus on
accuracy, transparency and long-term results.
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People -- Having sufficient personnel with knowledge,
experience, and training in GAAP principles. Financial leaders will be
required to take comprehensive, ongoing accounting standards and
policies training. Personnel actions –
including terminations, reassignments, reprimands, increased
supervision, training and financial penalties –
have been or will be taken.
-
Structure -- The company is in the process of reorganizing its
Finance function, segregating accounting and financial reporting
responsibility from planning and forecasting, to ensure increased
independence. The position of Chief Accounting Officer has been
strengthened, making it directly responsible for all accounting and
financial reporting functions worldwide.
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Process -- Efforts are underway to enhance and improve internal
controls around journal entry processes including account
reconciliation and documentation requirements. Investment in design
and implementation of additional and enhanced information technology
systems and elimination of manual processes to improve the reliability
of financial reporting and reduce the opportunities for errors or
omissions.
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.
Investor Conference Call and Shareholder Meeting Scheduled
Dell will conduct an investor conference call today Thursday, Aug. 16
at 5:15 p.m. CDT to discuss the completion of the Audit Committee’s
Independent Investigation. The conference call number in the U.S. is
877 253-8088; the international dial-in number is 706 643-0125, and
the passcode is: Dell. The call also will be available online at: http://www.dell.com/investor.
A replay of the investor call, beginning at 9:15 CDT Aug. 16, will be
available through Aug. 18, 12 a.m. CDT at: U.S., 800 642-1687;
International, 706 645-9291; Conference ID is 13409585.
Dell will announce preliminary Q2 fiscal year 2008 results on Aug. 30,
2007, and, expects to submit its past due form 10-K and 10-Q documents
by the first week of November. Its annual meeting of shareholders is
being planned for Dec. 4, 2007, and the company will soon update plans
for its analyst meeting.
In connection with the upcoming annual meeting of shareholders, Dell is
reopening the period during which shareholders can present proposals for
consideration at the meeting. A shareholder who desires to present a
proposal must submit the proposal no later than the close of business on
Oct. 5, 2007. In order for a proposal to be eligible for inclusion in
the proxy statement relating to the meeting, it must be received before
the close of business on Aug. 31, 2007.
About Dell
Dell Inc. NASDAQ:DELL listens to customers and delivers innovative
technology and services they trust and value. Uniquely enabled by its
direct business model, Dell is a leading global systems and services
company and No. 34 on the Fortune 500. For more information, visit www.dell.com,
or to communicate directly with Dell via a variety of online channels,
go to www.dell.com/conversations.
To get Dell news direct, visit www.dell.com/RSS.
Special Note
Statements in this press release that relate to future results and
events including statements about expected materiality or significance
and the quantitative effects of the restatement are forward-looking
statements based on Dell's current expectations. Actual results, as well
as Dell’s expectations regarding materiality
or significance, the restatement’s
quantitative effects, the effectiveness of disclosure controls and
procedures, and deficiencies in internal control over financial
reporting, may differ materially from those in the forward-looking
statements because of a number of risks and uncertainties, including:
the risk that additional information may arise during the completion of
our work on the restatement, our independent auditor’s
review of the investigation and its audit work, or the Audit Committee’s
final review of the investigation and the restated financial statements,
or as a result of other subsequent events; any additional issues or
matters arising from the ongoing SEC investigation; our ability to
successfully remediate identified internal control deficiencies; our
ability to meet NASDAQ requirements for continued listing as a result of
our past due periodic report filings; general economic, business and
industry conditions; our ability to maintain a cost advantage over our
competitors; local economic and labor conditions, political instability,
unexpected regulatory changes, trade protection measures, tax laws,
copyright levies and fluctuations in foreign currency exchange rates;
our ability to accurately predict product, customer and geographic sales
mix and seasonal sales trends; information technology and manufacturing
infrastructure failures; our ability to effectively manage periodic
product transitions; our reliance on third-party suppliers for quality
product components, including reliance on several single-source or
limited-source suppliers; our ability to access the capital markets;
litigation and governmental investigations or proceedings arising out of
or related to accounting and financial reporting matters; our
acquisition of other companies; our ability to properly manage the
distribution of our products and services; effective hedging of our
exposure to fluctuations in foreign currency exchange rates and interest
rates; obtaining licenses to intellectual property developed by others
on commercially reasonable and competitive terms; our ability to
attract, retain and motivate key personnel; loss of government
contracts; expiration of tax holidays or favorable tax rate structures;
changing environmental laws; and the effect of armed hostilities,
terrorism, natural disasters and public health issues. Additional
discussion of factors affecting Dell's business and prospects is
contained in Dell's periodic filings with the Securities and Exchange
Commission.
