Read the following article about a case of financial statement fraud.
What type of financial statement fraud was perpetrated?
What were the red flags (if any) in the case?
How did the scheme come to light?
What steps would you implement to prevent this type of fraud in the future? Did the external auditor in each case detect fraud? Why?
How does this case differ from the other?
PC maker Dell and its chairman Michael Dell will pay fines of $100m (£65.2m) and $4m respectively to settle US Securities and Exchange Commission charges that it misled investors through false accounting to meet Wall Street expectations, the stock market regulator said yesterday.
The charges relate to fees paid between 2002 and 2006 by chipmaker Intel to remain the sole supplier of some microprocessors after Dell said it would buy chips from Intel's rival AMD. The payments represented up to 76% of Dell's operating profit, the SEC said.
"These payments, rather than the company's management and operations, allowed Dell to meet its earnings targets," the SEC said.
After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability, it said.
Together with Michael Dell, the SEC charged former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations.
It charged Schneider, former regional vice-president of finance Nicholas Dunning, and former assistant controller Leslie Jackson, with improper accounting.
Without the Intel payments, Dell would have missed the EPS (earnings per share) consensus in every quarter during the period, the SEC said, in a complaint filed in a Washington court.
The SEC alleged that 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 between financial years 2002 and 2005.
Dell's fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company's management and operations, the SEC said.
According to the complaint, Intel made exclusivity payments to Dell for Dell to not use CPUs made by AMD. These grew from 10% of Dell's operating income in financial year 2003 to 38% in 2006, and peaked at 76% in the first quarter of its financial year 2007.
When Intel cut its payments after Dell agreed to buy AMD chips, Dell's operating income in 2Q07 dropped 75%.
The SEC alleged that the accused failed to disclose the true reason for the drop.
"Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a supplier," the SEC said. "Nevertheless, in Dell's second quarter FY 2007 earnings call, they told investors that the sharp drop in the company's operating results was attributable to Dell pricing too aggressively in the face of slowing demand, and to component costs declining less than expected."
The SEC's complaint also alleged that the reserve manipulations allowed Dell to miss-state materially its earnings and its operating expenses as a percentage of revenue, a key performance indicator, for more than three years.
The manipulations also let Dell miss-state materially the trend and amount of operating income of its key EMEA division between its third quarter of 2003 and its first quarter of 2005.
The fines settlement allows the accused to avoid admitting or denying the SEC's allegations, but all have signed consent orders to not violate federal laws.
PC maker Dell and its chairman Michael Dell will pay fines of $100m (£65.2m) and $4m respectively to settle US Securities and Exchange Commission charges that it misled investors through false accounting to meet Wall Street expectations, the stock market regulator said yesterday.
The charges relate to fees paid between 2002 and 2006 by chipmaker Intel to remain the sole supplier of some microprocessors after Dell said it would buy chips from Intel's rival AMD. The payments represented up to 76% of Dell's operating profit, the SEC said.
"These payments, rather than the company's management and operations, allowed Dell to meet its earnings targets," the SEC said.
After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability, it said.
Together with Michael Dell, the SEC charged former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations.
It charged Schneider, former regional vice-president of finance Nicholas Dunning, and former assistant controller Leslie Jackson, with improper accounting.
Without the Intel payments, Dell would have missed the EPS (earnings per share) consensus in every quarter during the period, the SEC said, in a complaint filed in a Washington court.
The SEC alleged that 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 between financial years 2002 and 2005.
Dell's fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company's management and operations, the SEC said.
According to the complaint, Intel made exclusivity payments to Dell for Dell to not use CPUs made by AMD. These grew from 10% of Dell's operating income in financial year 2003 to 38% in 2006, and peaked at 76% in the first quarter of its financial year 2007.
When Intel cut its payments after Dell agreed to buy AMD chips, Dell's operating income in 2Q07 dropped 75%.
The SEC alleged that the accused failed to disclose the true reason for the drop.
"Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a supplier," the SEC said. "Nevertheless, in Dell's second quarter FY 2007 earnings call, they told investors that the sharp drop in the company's operating results was attributable to Dell pricing too aggressively in the face of slowing demand, and to component costs declining less than expected."
The SEC's complaint also alleged that the reserve manipulations allowed Dell to miss-state materially its earnings and its operating expenses as a percentage of revenue, a key performance indicator, for more than three years.
The manipulations also let Dell miss-state materially the trend and amount of operating income of its key EMEA division between its third quarter of 2003 and its first quarter of 2005.
The fines settlement allows the accused to avoid admitting or denying the SEC's allegations, but all have signed consent orders to not violate federal laws.
PC maker Dell and its chairman Michael Dell will pay fines of $100m (£65.2m) and $4m respectively to settle US Securities and Exchange Commission charges that it misled investors through false accounting to meet Wall Street expectations, the stock market regulator said yesterday.
The charges relate to fees paid between 2002 and 2006 by chipmaker Intel to remain the sole supplier of some microprocessors after Dell said it would buy chips from Intel's rival AMD. The payments represented up to 76% of Dell's operating profit, the SEC said.
"These payments, rather than the company's management and operations, allowed Dell to meet its earnings targets," the SEC said.
After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability, it said.
Together with Michael Dell, the SEC charged former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations.
It charged Schneider, former regional vice-president of finance Nicholas Dunning, and former assistant controller Leslie Jackson, with improper accounting.
Without the Intel payments, Dell would have missed the EPS (earnings per share) consensus in every quarter during the period, the SEC said, in a complaint filed in a Washington court.
The SEC alleged that 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 between financial years 2002 and 2005.
Dell's fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company's management and operations, the SEC said.
According to the complaint, Intel made exclusivity payments to Dell for Dell to not use CPUs made by AMD. These grew from 10% of Dell's operating income in financial year 2003 to 38% in 2006, and peaked at 76% in the first quarter of its financial year 2007.
When Intel cut its payments after Dell agreed to buy AMD chips, Dell's operating income in 2Q07 dropped 75%.
The SEC alleged that the accused failed to disclose the true reason for the drop.
"Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a supplier," the SEC said. "Nevertheless, in Dell's second quarter FY 2007 earnings call, they told investors that the sharp drop in the company's operating results was attributable to Dell pricing too aggressively in the face of slowing demand, and to component costs declining less than expected."
The SEC's complaint also alleged that the reserve manipulations allowed Dell to miss-state materially its earnings and its operating expenses as a percentage of revenue, a key performance indicator, for more than three years.
The manipulations also let Dell miss-state materially the trend and amount of operating income of its key EMEA division between its third quarter of 2003 and its first quarter of 2005.
The fines settlement allows the accused to avoid admitting or denying the SEC's allegations, but all have signed consent orders to not violate federal laws.