Dell Sheds Light On Investigations

In an 8-K report of special events filed with the U.S. Securities and Exchange Commission, Dell said it believes it handles its accounting properly but could suffer if the Round Rock, Texas-based company is found to have accounted some of its numbers improperly. The new information came after Dell reported its fiscal third-quarter results Tuesday.

"Dell is involved in various claims, suits, investigations and legal proceedings. As required by Statement of Financial Accounting Standards No. 5, 'Accounting for Contingencies', the company accrues a liability when management believes that it is both probable that a liability has been incurred and the company can reasonably estimate the amount of the loss," Dell said in the SEC filing. "Management believes that the company appropriately accrues for all such matters. However, the unfavorable resolution of one or more of these matters in a particular period could adversely affect our operating results."

Dell also revealed that it's now the subject of several federal shareholder and other lawsuits, including three in the Western District of Texas, Austin Division, naming Dell Inc., Dell CEO Kevin Rollins and Dell CFO Jim Schneider as defendants. Dell said the company will fight the lawsuits.

Dell first acknowledged an "informal" inquiry by the SEC in August, saying the regulators had been asking Dell questions for a year. At the time, Dell said that while responding to the SEC questions, management found some issues that it determined should be investigated by the Audit Committee of its board of directors. Then, on Sept. 11, the company revealed that the prosecutors from the office of the U.S. Attorney for the Southern District of New York had subpoenaed financial records going back to 2002. And last week, when Dell initially delayed announcing its third-quarter earnings, the company said the SEC's informal inquiry had become a formal investigation.

The myriad of investigations put a damper on Dell's third-quarter report, in which the company turned in better-than-expected earnings and on-target revenue.

Some industry observers have begun speculating that Dell may have been tripped up by its method of accounting for sales of extended warranties and accruals of warranty-related liabilities.

"With Dell, they will try to sell you on long-term, on-site service contracts," said David Chang, president of Agama Systems, a Houston-based system builder and Dell competitor. "Dell has been doing this for many years. Do they amortize the income over, say, five years or do they capitalize it when they pay?"

Dell said it continues to cooperate with the SEC and with its board's Audit Committee but won't file its 10-Q quarterly report with the SEC on time. The company also failed to file a 10-Q for its second quarter.

In the 8-K filing, Dell said it "is committed to resolving the issues raised in connection with the investigations and regaining compliance" with the SEC, as well as requirements from the Nasdaq stock exchange, which has been threatening to delist Dell because of the delinquent filings.