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Dell Shares Dip After Accounting Misconduct Uncovered In Probe

CNBC.com
Friday, 30 Mar 2007 | 11:35 AM ET

Dell shares were slightly lower on Friday following the disclosure that an internal audit of its accounting found evidence of misconduct, errors and deficiencies in its financial controls.

The world's second-largest personal computer maker said it is working with its auditors and management to determine whether restatements of past financial statements are needed, and to see if the control deficiencies "constitute a material weakness" in its internal control over financial reporting.

Analysts mostly said the news shouldn't come as a surprise, given the exodus of executives including the former chief executive and chief financial officer. While the statement highlights the accounting risk and distracts from Dell's turnaround, analysts said it's unlikely the company will be delisted or current executives will face criminal charges.

Dell announced last August that it had been investigating its accounting for a year. Later in 2006, the company said the U.S. Securities and Exchange Commission and U.S. federal prosecutors were investigating its past accounting.

Founder Michael Dell in January retook the helm of the company from Kevin Rollins, who left after the investigations were disclosed and a series of lower-than-forecast financial results. The company last year lost the No. 1 PC market share ranking to rival Hewlett-Packard .

According to Citigroup analyst Richard Gardner, the release contains "more good news than bad."

Because Dell said it is trying to determine whether restatements are necessary, Gardner said he expects the accounting errors may be so minor as not to require restatements at all. He predicted any restatements will be very minor, and misconduct is unlikely to hurt earnings by more than 5%.

Whatever the accounting errors are, Friedman Billings Ramsey analyst Clay Sumner said Dell has probably fixed them. This is evidenced by a 3.17 percentage-point tightening in operating profit margin in the first quarter after the accounting investigation was announced.

Dell said on Thursday the accounting review meant it would not file its annual report with securities regulators by the April 3 due date, or by an extension date of April 18.

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