Dell's Fraud Report Raises Questions about SarbOx, Earnings

from the just-a-few-pennies dept

This evening, Dell announced the preliminary results of a multi-month investigation into past accounting irregularities. As many had expected, the company revealed that management had deliberately massaged results to hit Wall Street targets. That being said, the total size of the fraud was not particularly significant. Overstating earnings between $50 million - $150 million between 2003-2006 is not all that big for a company as big as Dell. This doesn't excuse what the company did, but it does raise some questions about the incentives facing business managers. In the post-SarbOx era, these kinds of infractions can lead to serious penalties, and yet managers felt it was worthwhile to add a penny here and there in order to satisfy the Street's demands. Not only did SarbOx not do anything to prevent the fraud, but it didn't even prove to be a deterrent. The event should call into question the usefulness of the law, while also reigniting debate about the 'tyranny' of quarterly earnings, which pushes companies to make these choices.

Filed Under: fraud, sarbox
Companies: dell


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  • identicon
    Sneeje, 16 Aug 2007 @ 6:21pm

    Huh?

    I think you're right to question why Dell would do this, given the risk, but why wouldn't this logic apply to all laws with penalties associated with infractions? There is no law/penalty in existence that prevents all infractions. People still commit murders in the face of stiff penalties, so are those laws not useful?

    I admit I'm stumped by Dell's behavior but I think that perhaps the insight here lies not with the speculated weakness of SarbOx.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 16 Aug 2007 @ 6:51pm

    Interesting article.

    "it does raise some questions about the incentives facing business managers"
    That is one of the most important causes of fraudulent reporting. No law can prevent someone from juicing the numbers if the incentives are large enough, and there's little fear of detection and serious punishment.

    "SarbOx . . didn't even prove to be a deterrent."
    I get the feeling (although you didn't say so) that you believe that SarbOx being "useless", it should be repealed or weakened in some way. How will that improve deterrence? Its failure to deter wrongdoing should be remedied by making it stricter, and the punishments harsher - a more effective deterrent.

    "the 'tyranny' of quarterly earnings"
    This is the undue influence of Wall Street on how businesses are run. Don't let Wall Street run your company. Run it the way it should be run. If your board doesn't like it, find a company that's interested in earning profits rather than just the short term fluctuations of the stock price. The stock price will do better over the long term.

    reply to this | link to this | view in chronology ]

  • identicon
    joe, 16 Aug 2007 @ 7:22pm

    Overstating earnings between $50 million - $150 million between 2003-2006 is not adding a penny here and there in order to satisfy the Street's demands. Maybe some time in prison for the guilty parties would be a deterrent against Dell doing this again.

    reply to this | link to this | view in chronology ]

  • identicon
    Joe Smith, 16 Aug 2007 @ 7:48pm

    Responsibility

    I don't think they have given details of how it happened but from what I have read it could be something as simple as a single division, far from the oversight of management, doing a little anticipatory invoicing or not recording invoices in a timely fashion.

    This type of thing usually seems to start in response to a small miss that the someone thinks can be caught up next quarter and then it snowballs.

    We have been free from scandals while the economy was booming but if the economy starts to cool off the types of frauds that I mention will probably be widespread for a while.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 17 Aug 2007 @ 2:05am

    Anti-SarbOx again

    "Not only did SarbOx not do anything to prevent the fraud, but it didn't even prove to be a deterrent."

    Once again Techdirt makes no attempt to justify it's SarbOx position but simply passes on a position from somewhere else that techdirt doesn't really understand. Isn't that what corporate schills do ?.

    Any genuine attempt to understand would attempt to gauge what might have happened had SarbOx not existed - e.g would the fraud hve been bigger ? when would it have been discovered (if ever) ?

    reply to this | link to this | view in chronology ]

  • identicon
    RandomThoughts, 17 Aug 2007 @ 7:43am

    SOX isn't there to prevent companies from doing these types of things, its there to punish executives for doing these kind of things. The punishment is the deterrent. Getting rid of the punishment just doesn't make sense.

    If you ask progressive executives, SOX actually provides a benefit. Those that look at SOX as just a task they must do don't see benefits. Those that look at SOX as a way to transform their organization and the way they do business actually see the upside to SOX.

    reply to this | link to this | view in chronology ]

    • identicon
      |333173|3|_||3, 17 Aug 2007 @ 8:10am

      Re:

      According to Fortune (6th Aug), SOx is one of the reasons for the increase in the number of foreign companies listed on the London Stock Exchange compared with Wall Street.

      Related to teh "tyranny" of quarterly earnings, the recent dip in the share price of google because their growth was only 24% (not 27% as expected), ignoring the fact that any other company with a 24% growth would be amazing.

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 17 Aug 2007 @ 6:37pm

        Re: According to Fortune

        Consider the source - Fortune magazine. A shill for big business and speculating in the stock market.

        reply to this | link to this | view in chronology ]

  • identicon
    Bystander, 18 Aug 2007 @ 7:09am

    Missing the point

    Both the article and the following comments miss a key point. It wasn't that Dell was jiggering the numbers to meet stock market expectations. It was unethical employees who jiggered numbers to fraudulently claim bonuses despite missing their numbers. Dell's fault was in not having controls in place that could have prevented the fraud.

    reply to this | link to this | view in chronology ]

    • identicon
      reynard, 30 Oct 2007 @ 3:26pm

      Re: Missing the point

      unethical employees or employees under instruction??????
      how long was this realy going on??????


      try 1996, not 2003.


      reynard

      reply to this | link to this | view in chronology ]


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