1.Go to the SEC website and read the 2 SEC complaints concerning fraudulent and improper accounting, one against Dell Inc, M. Dell, K. Rollins, J. Schneider, L. Jackson, N. Dunning (Litigation Release 21599, dated 7/22/2010) and one against R. Imhoff, (Litigation Release 21634, dated 8/27/2010). (These are long documents, but pretty easy to read.) Copy and paste th two links in the browser: https://www.sec.gov/litigation/litreleases/2010/lr21599.htm and https://www.sec.gov/litigation/litreleases/2010/lr21634.htm

1st Link

The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.

The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation not to use central processing units (CPUs) manufactured by Intels main rival. It was these payments rather than the companys management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the companys decreased profitability.

The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.

Dell Inc. agreed to pay a $100 million penalty to settle the SECs charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SECs charges against them. Dunning and Jackson also agreed to settle the SECs charges.

The SECs complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the companys ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. For instance, in one internal 2004 email to Michael Dell in which Rollins argued that Dell should diversify its business toward higher margin server and other products, Rollins noted that Dells reliance on Intel payments was a strategic problem, stating that for 3 qtrs now, Intel money has made the qtr. A bad way to run the railroad. Rollins subsequently forwarded the email to Schneider.

The SECs complaint further alleges that Dells most senior former accounting personnel, including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of cookie jar reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dells fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the companys management and operations.

According to the SECs complaint, Intel made exclusivity payments to Dell in order for Dell not to use CPUs manufactured by its rival Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dells operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the companys sharp drop in its operating results in its second quarter of fiscal 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dells operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dells second quarter FY 2007 earnings call, they told investors that the sharp drop in the companys operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.

The SECs complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue an important financial metric that the Company itself highlighted for over three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.

Without admitting or denying the SECs allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.

Michael Dell and Rollins consented to settle the SECs disclosure charges, without admitting or denying the SECs allegations, to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.

Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SECs allegations, and agreed to pay a penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SECs improper accounting charges without admitting or denying the SECs allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commissions Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.

The SECs investigation is continuing as to other individuals.

The SEC acknowledges the assistance of the Federal Trade Commission in this investigation.

2nd Link

The Securities and Exchange Commission today charged former Dell Inc. ("Dell") Chief Accounting Officer Robert W. Davis for his role in the company's accounting fraud. Last month, the SEC charged Dell with fraud for materially misstating its operating results from fiscal year 2002 to fiscal year 2005. The SEC's complaint against Davis alleges that he materially misrepresented Dell's financial results by using various "cookie jar" reserves to cover shortfalls in operating results and engaged in other reserve manipulations from FY2002 to FY2005. Davis agreed to pay a $175,000 penalty and to pay disgorgement and pre-judgment interest to settle the SEC's charges.

The SEC separately charged today former Dell Assistant Controller Randall D. Imhoff with aiding and abetting Dell's improper accounting. Imhoff agreed to pay a $25,000 penalty and to pay disgorgement and pre-judgment interest to settle the SEC's charges. The SEC's complaint against Davis, filed in federal district court in Washington, D.C., alleges that he directed the use of "cookie jar" reserves to cover shortfalls in operating results over three years. This fraudulent accounting made it appear that Dell was consistently meeting Wall Street earnings targets through the company's management and operations. The SEC's complaint further alleges that the reserve manipulations allowed Dell to materially misstate its operating expenses as a percentage of revenue - an important financial metric that Dell highlighted to investors. The manipulations also enabled Dell to materially misstate the operating income of its Europe, Middle East and Africa ("EMEA") segment.

The SEC's complaint alleges that Davis directed that Dell maintain cookie jar reserves - which he referred to as "contingencies" - to cover future liabilities. The SEC alleges that an example of this misconduct related to Dell's use of excess tax reserves identified in its Japanese business unit. The complaint alleges that Dell identified an excess tax reserve in Dell Japan in the fourth quarter of FY2003. Rather than releasing the entire excess to its income statement, as required by Generally Accepted Accounting Principles ("GAAP"), Dell transferred the bulk of the excess to a cookie jar reserve account in its corporate division that Davis tracked. Two quarters later, Dell released this excess to offset the income statement impact to Dell from a litigation settlement and otherwise provide a boost to Dell's operating results. In another example, the SEC's complaint alleges that Davis improperly manipulated Dell's bonus and profit sharing accounts by "bleeding down" the amounts of excess accruals over time, rather than recording the entire excess in its income statement when it was first identified as required by GAAP.

In a separate complaint also filed in federal district court in Washington, D.C., the SEC alleges that Imhoff aided and abetted Dell's improper use of "cookie jar" reserves and other reserve manipulations to cover shortfalls in Dell's operating results from FY2002 to FY2004. The SEC's complaint alleges that Imhoff, acting under his supervisors' general direction, planned and issued instructions regarding Dell's build-up and use of cookie jar reserves. In an example of his involvement in Dell's other improper reserve manipulations, the SEC's complaint alleges that Imhoff failed to ensure that Dell increased its reserves, as required by GAAP, after learning that an accrual to cover the costs of closing a Dell facility in Texas was inadequate.

Without admitting or denying the SEC's allegations, Davis consented to the entry of an order that permanently restrains and enjoins him from violation of Section 17(a)(2) and (3) of the Securities Act of 1933 and Section 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13. Davis also agreed to pay a penalty of $175,000, disgorgement of $19,080, and prejudgment interest of $9,078. In his settlement offer, Davis also consented to the issuance of an administrative order pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending him from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after five years.

Without admitting or denying the SEC's allegations, Imhoff consented to the entry of an order that permanently restrains and enjoins him from violation of Exchange Act Section 13(b)(5) and Rules 13b2-1 and 13b2-2, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13. Imhoff also agreed to pay a penalty of $25,000, disgorgement of $12,852, and prejudgment interest of $6,197. In his settlement offer, Imhoff also consented to the issuance of an administrative order pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending him from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after three years.

2.Find the Dell 10-K dated February 2, 2007. Read the Note 2, Managements Certification and the auditors report.

3.Answer the following questions:

A. The SEC enumerated more than one mechanism used to manage earnings. Describe the specific accounting used by Dell that the SEC found misleading. How did each of the specific accounting methods violate GAAP? In particular, discuss:

i. Restructuring Charges

B. The SEC focused on the Operating Expenses as a Percentage of Revenue ratio as one of the key indicators that misled investors. Why did the SEC consider this particular ratio so important as compared to more common profitability indicators such as the profit margin and ROE?

C. Underlying the misstatements were inherent weaknesses in the system of internal controls over financial reporting. What were the critical weaknesses that were identified?