SEC charges Dell duo over 'cookie jar' reserves

Former Dell chief accounting officer Robert Davis and his former assistant controller Robert Imhoff have paid more than $250,000 to settle charges brought against him by the US Securities and Exchange Commission.

Following the deal agreed with Michael Dell and other executives in July over SEC false accounting charges, Davis and his former assistant controller Randall Imhoff were hit with public complaints for their role in padding Dell’s 2002-05 financial results through improper use of cookie jar reserves.

While the terms of the financial settlements reached by the two Dell finance executives mean they neither admitted or denied the allegations, they were both fined significant sums and will be barred from acting as accountants for SEC-registered companies - for five years’ in Davis’s case and three for Imhoff.

According to the official complaint (230kb PDF), Davis was responsible for cookie jar reserves - which he referred to as “contingencies” – that were used to cover unforeseen liabilities and to ensure the company’s revenue figures met analysts’ expectations. The manipulations allowed Dell to misreport its operating expenses as a percentage of revenue, which it highlighted as an important performance measure. Dell also used reserves to overstate its Europe, Middle East and Africa (EMEA) operating income.

The suspect reserves were identified as the Strat Fund (short for strategic” and other “corporate contingencies”; accrued relocation accruals; a corporate restructuring reserve; bonus and profit-sharing accruals; and a number of reserves in EMEA and elsewhere. These reserves were not allowed under Statement Financial Accounting Standards No. 5, ‘Accounting for Contingencies’ (“SFAS 5”), which holds that any over-accrual of a reserve should be reversed into the income statement as soon as the over-accrual is discovered.

Dell’s apparent ability to meet analyst expectations was a centrepiece of the company’s financial strategy, and was met by praise such as this February 2003 comment from a Goldman Sachs research report that “consistency is the hallmark of Dell’s financials”.

In the 14 quarters from Q1FY02 through Q2FY05, Dell made 23 releases from the Strat Fund and other corporate contingencies, 16 of which were recorded after quarters ended, while Dell was in the process of closing its books. The releases misstated Dell’s operating results to hit earnings per share estimates and allowed Dell to misrepresent its operating expenses trends to sustain the illusion that it had a more efficient business model than its rivals.

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