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Dell Presentation

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by

Kurt Blackburn

on 28 February 2013

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Transcript of Dell Presentation

ACCOUNTING FRUAD AT DELL, INC. Perpetrator #1: Robert W. Davis Had the Typical Fraudster Profile
51 years old
Bachelor's Degree in Commerce and Accounting from the University of Virginia
MBA from Columbia University
Licensed as a Certified Public Accountant
Before working for Dell, worked for the auditing firm Price Waterhouse from 1980-1991
Worked for Dell from 1996-2005, where he held the positions of Vice President of Corporate Finance and Chief Accounting Officer Perpetrator #2: Randall D. Imhoff Imhoff also had the typical fraudster profile
48 years old
Bachelor's Degree in Accounting from Iowa State University
Licensed as a Certified Public Accountant
Before working for Dell, worked for the auditing firm Arthur Andersen LLP from 1984-2000, rising to the level of partner
Worked for Dell from 2000-2007, holding the positions of Corporate Assistant Controller, Finance Director for US Small and Medium Business and Finance Director for Global I/T THE PERPETRATORS THE MOTIVE Must Be The Money Both Davis and Imhoff were enrolled in Dell's Incentive Bonus Plan
Dell employees in the plan would receive a bonus based on certain factors, such as:
Operating Margin
Revenue Growth
Customer Experience
Globalization
Individual Performance Reviews
As will be seen, the fraud committed at Dell, Inc by Davis and Imhoff greatly influenced operating margin and thereby resulted in higher bonus numbers for each By: Kurt Blackburn OVERVIEW OF THE FRAUD SCHEMES The fraud committed was primarily through various "cookie jar" reserves
"Strat Fund" and other "Corporate Contingencies"
Relocation Reserves
Restructuring Reserves
Restructuring Reserves for Europe, Middle East and Africa (EMEA) Segment
Bonus and Profit-sharing Accruals
An Under-accrued Restructuring Reserve for Las Cimas, TX Facilities THE NITTY GRITTY OF THE FRAUD SCHEMES The Strategic Fund and Corporate Contingencies Davis and Imhoff had frequent communication with each other in order to decide what to do with over-accruals and colluded to override internal controls.
Once they made decisions as to where the money should go, they would direct subordinates as to how they wanted over-accruals to be treated in the accounting system. Corporate Contingencies were part of the "other accrued liabilities" account
This account, #24990, was improperly used to reduce future operating expenses in order to offset unforeseen expenses
From Q1FY02 - Q2FY05, Dell made 23 releases from this fund
16 of these were recorded just after quarters ended, when there would be confusion due to closing the quarter Relocation Reserves There were at least 2 over-accruals carried to future periods used to offset expenses unrelated to Relocation Expense
A $6 million over-accrual for relocation expenses was carried forward to the next quarter before being released
Another $5 million over-accrual was found in the next fiscal year and carried forward 2 quarters and was used against unrelated operating expenses Restructuring Reserves In the 2nd quarter of Fiscal Year 2002, a $482 million reserve was accrued for restructuring so Dell could exit certain activities
In this accrual there was excess from inception
Another $40 million in excess accruals were later added
The excess amounts were transferred to account 24990, the "other accrued liabilities" account
The excesses were applied to operating expenses in order to increase earnings numbers Restructuring Reserves for EMEA Segment Improperly accrued a $26 million restructuring reserve for their EMEA segment from Q3FY03 - Q1FY04
Most of these reserves were released in Q2FY04, the balance were released the following quarter
While Dell held the reserves, they were improperly classified in their books as reserves for factory invoices that were unrelated to restructuring Bonus and Profit-sharing Accruals In fiscal years 2001 and 2002, Dell had over-accruals for bonuses and profit-sharing
Instead of reversing them, they carried the overages forward and gradually bled them down through fiscal years 2002 and 2003
Dell carried forward $38.6 million in over-accruals from 2001 that they gradually bled down in 2002
They carried forward about $19 million in over-accruals from 2002 that were bled down in 2003 Restructuring Reserve for Las Cimas, TX Facility In this case, Dell accrued $53 million less than needed to close facilities in Las Cimas, TX
Davis and Imhoff were both aware of the need to expense further funds for this restructuring as of Q1FY04
The reserve to close this facility was not increased until Q3FY06 Investigation, SEC Charges, and Settlement Agreements Internal Auditors conducted an investigation from August 2006 - August 2007
Results of the investigation:
Announcement that Financial Statements from Fiscal Year 2003 through the 1st quarter of Fiscal Year 2007 were unreliable
Restatement of Financial Statements from Fiscal Year 2003 through the 1st quarter of Fiscal Year 2007 Davis was charged by the SEC with material misstatement of operating results
Imhoff was charged by the SEC with aiding and abetting the improper reporting
Both neither confirmed nor denied the charges
Davis agreed to the following:
$175,000 penalty
$19,080 in disgorgement
$9,078 in prejudgment interest
Suspended from appearing or practicing as an accountant in front of the SEC for at least 5 years
Imhoff agreed to the following:
$25,000 penalty
$12,852 in disgorgement
$6,197 in prejudgment interest
Suspended from appearing or practicing as an accountant in front of the SEC for at least 3 years Investigation and Restatement SEC Charges and Settlement Agreements
Full transcript