1. For each of the accounting issues discussed in the body of the case and in Exhibit 2:
a. Discuss whether the accounting rule seems reasonable.
b. Discuss whether it seems likely that Dell recorded the transaction improperly to manipulate results or whether it was more likely an honest mistake (e. g., Dell did not know about the rule; the implementation relied on judgment and the investigators had the benefit of hindsight, or the sheer volume of low- value orders Dell ships, possibly as many as 10,000 to 20,000 each day, makes it very difficult to properly implement these detailed rules.)
c. Discuss whether the error is material and should have been disclosed.
2. For most of the above items, firms following IFRS will lack detailed guidance, so they will rely on reasonable judgment. Having detailed rules clearly increases consistency, but the United States has such detailed rules that no one knows them all. To ensure compliance, firms need individuals or teams who specialize in various aspects of accounting. One team may specialize in revenue recognition, another in leasing, a third in fair value, and a fourth in hedging rules:
a. Is the consistency provided by the rules described in this case worth the cost of complying with them? Explain.
b. Would a senior executive at a firm such as Dell prefer U.S. GAAP rules or IFRS rules? Explain.
c. Would a user of external financial statements, such as an investment manager, prefer U.S. GAAP rules or IFRS rules? Explain.
3. At the start of the investigation, which cost $ 205 million, Dell did not know the extent of the problems. 13 Should Dell have been required to undertake this investigation?
4. Exhibit 2 includes income statements for fiscal years 2005 and 2006 with “as reported” and “ as restated” numbers, a balance sheet for 2006 with “ as reported” and “ as restated” numbers, a statement of cash flows with “ as reported” and “ as restated” numbers for both 2005 and 2006, and a table showing changes in “ retained earnings” for 2003 through 2006. Given the accounting issues involved, the cost of the investigation, and the dollar amount of the restatements, were the restatements worth their cost? As part of your answer, discuss whether an analyst would change his or her estimated value of Dell or, equivalently, change his or her estimates of Dell’s future prospects as a result of these restated financial statements.
5. Exhibit 3 discusses changes Dell is making to its accounting organization and to its control procedures. Evaluate those changes in terms of their probable costs and benefits. Why is Dell making the changes?
With $ 1,000 of start-up capital, Michael Dell founded Dell Inc. in his University of Texas dorm room in 1984; three years after International Business Machines launched its first personal computer (PC), which used Microsoft’s Disk Operating System (DOS). In 1985, Dell shipped its first PC. Thousands of entrepreneurs began selling personal computers and dozens of them advertised heavily through PC Magazine and other computer magazines, but Dell was by far the most successful. It offered risk-free returns, next-day at-home assistance, leading edge technology, and low prices. In 1988, Dell raised $ 30 million in its initial public offering (IPO), paving the way for a market value of $ 85 million. The firm grew rapidly as PCs gained widespread use. By 1989, Dell revenues were $ 388 million, and net income was $ 5 million. By 1992, revenues were $ 2 billion, and net income increased to $ 101 million. Other firms have grown more rapidly, but they have all been software or Internet firms, which require far less infrastructure. Most manufacturing firms need decades to reach $ 2 billion in revenues. As they grow, they gradually develop and install control systems for engineering, product development, inventory, manufacturing, quality assurance, sales, customer service, accounting, and finance. They also hire and develop a management team that grows with the firm, so senior executives are highly knowledgeable about their function and have long histories of dealing with executives in other regions and functional areas.