The Securities and Exchange Commission has charged Dells former chief accounting officer and assistant controller with accounting fraud, and they agreed Monday to collectively pay $200,000 in penalties, plus disgorgement and interest, to settle the charges.
The SEC charged former Dell chief accounting officer Robert W. Davis with fraud for materially misstating the computer makers operating results from fiscal year 2002 to 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. Without admitting or denying the SECs allegations, Davis agreed to pay a $175,000 penalty along with disgorgement of $19,080 and prejudgment interest of $9,078, to settle the SEC's charges.
He also consented to the issuance of an administrative order suspending him from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after five years.
Last month, the company agreed to pay $100 million to settle SEC charges, while chairman and CEO Michael Dell and former CEO Kevin Rollins each agreed to pay $4 million in penalties, and former CFO Kevin Schneider agreed to pay $3 million to settle the SECs charges (see Dell Settles SEC Charges for $100 Million).
In addition, the SEC separately charged former Dell assistant controller Randall D. Imhoff with aiding and abetting the companys improper accounting. Without admitting or denying the allegations, Imhoff agreed to pay a $25,000 penalty, together with disgorgement of $12,852 and prejudgment interest of $6,197, to settle the SECs charges. In his settlement offer, Imhoff also consented to the issuance of an administrative order suspending him from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after three years.
The SEC claimed that Dells use of cookie jar reserves made it appear that the company was consistently meeting Wall Street earnings targets through its management and operations. However, 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 segment.
The SECs complaint alleges that Davis directed that Dell maintain cookie jar reserves which he referred to as contingencies to cover future liabilities. An example of this misconduct related to Dells use of excess tax reserves in its Japanese business unit. 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 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 SECs complaint alleges that Davis improperly manipulated Dells 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 Dells improper use of cookie jar reserves and other reserve manipulations to cover shortfalls in Dells operating results from FY2002 to FY2004.
The SECs complaint alleges that Imhoff, acting under his supervisors general direction, planned and issued instructions regarding Dells build-up and use of cookie jar reserves. In an example of his involvement in Dells other improper reserve manipulations, the SECs 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.
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