Term Paper: Dell Inc. Fraud Business Practices

Pages: 5 (1401 words)  ·  Bibliography Sources: 6  ·  Level: College Senior  ·  Topic: Business  ·  Buy This Paper

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[. . .] The intense focus and stringent rules of Wall Street for companies to remain profitable consistently each and every year are something that needs serious revision. A company that doesn't get involved in some accounting irregularities might now be an exception and not a rule; since it is not possible to meet earnings targets each quarter without fail. What Dell did could be easily understood and in the long run even forgiven because this kind of fraud would keep happening if Wall Street continues to demand certain targets each quarter. (Hess 2010)

Dell's Michael Dell had been telling investors that his company's ability to meet earnings targets for 20 quarters was due to "superior operations" but it was later found that Dell's failure to disclose the magnitude of exclusivity payments were the main reason it was able to meet investor expectations for 20 quarters. It had nothing to do with strategy or superior operations management.

We need to pay closer attention to how this accounting fraud took place. In 2010 SEC accused Dell of presenting false information to its investors about how it was meeting earnings targets. The company had used the money made from its contract with Intel to pad its quarterly earnings, something that investors were never told. This was how Dell was able to surpass everyone's expectations. Any rebates issued to a company must be included in the financial statements and Dell was receiving rebates from Intel for not using any chips other than Intel's chips in its computers. These rebates can come under fire for violating anti-trust laws and hence were never disclosed. In order not to come under fire, Dell finally allowed AMD to become its second supplier, this led to a drastic decreased in rebates earned from Intel and Dell's financial health suffered. But investors or SEC never came to know about the magnitude of these payments or how they were being used. "Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved but could not…Dell was only able to meet Wall Street targets consistently during this period by breaking the rules." said Christopher Conte, associate director of the S.E.C.'s enforcement division, in a statement announcing the settlement.

It was said that without these payments, Dell's performance would not have been what it appeared to be during the past one decade. These exclusivity payments were an important part of company's earnings per share. They were only 10% of the total earnings in 2003 but then went up to 76% in 2007 which shows just how massive was the part played by exclusivity payments. In the period from 2003 and 2007, the payments amounted to $4.3 billion and while Dell and Intel developed a complex pricing system between them to show that these payments were meant to be something other than exclusivity payments.

While these payments were essentially paid so Dell wouldn't use chips from any other manufacturer, in 2033, Dell had been talking to IBM and Microsoft about possibility of ownership in AMD. Interestingly Michael Dell was very candid with Intel about why he needed exclusivity payments and frequently approached them.

The company refused to agree or disagree but instead went along with SEC's method of settling the charges by paying $100 million where Michael Dell and former CEO Kevin Rollins both agreed to pay $4 million out of their own pockets.

Dell's former CFO was also found involved. James M. Schneider was also made to pay $3 million fine under this settlement method. Apart from this, he was also asked to pay an additional 83,096 in disgorgement and $38,640 in prejudgment interest. (SEC report)

Federal Trade commission also played a significant role as it was credited for providing considerable assistance in the Dell case. Intel was also required to discuss a settlement method with FTC. Intel was not spared because FTC has been following anti-trust complaints against Intel for some time now and it has initiated investigations against Intel in many regions including Europe and Asia. Intel was also subject of a private anti-trust lawsuit by AMD.

REFERENCES

Hess, E. Stark Lessons From The Dell Fraud Case. Forbes. Oct… [END OF PREVIEW]

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Dell Inc. Fraud Business Practices.  (2012, May 3).  Retrieved April 19, 2019, from https://www.essaytown.com/subjects/paper/dell-inc-fraud-business-practices/8120294

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"Dell Inc. Fraud Business Practices."  Essaytown.com.  May 3, 2012.  Accessed April 19, 2019.
https://www.essaytown.com/subjects/paper/dell-inc-fraud-business-practices/8120294.