Dell’s Accounting Adjustments Raise Troubling Questions
Accounting concerns, ineffective internal controls, and an undisclosed SEC investigation
Click here for a printable PDF version of this report. All-access clients are welcome to contact us anytime to discuss.
Dell Technologies, Inc. – DELL
$ 115.93 US Mkt Cap: $77.2 B
Summary and Opinion:
Recent accounting issues at Dell deserve closer scrutiny. In February, Dell revised its financials after discovering $348 million in vendor credits recorded incorrectly. Not good. Let’s have a closer look.
Back in 2010, the SEC charged the former Dell, Inc. and its senior executives with disclosure and accounting fraud. The SEC said Dell used undisclosed exclusivity payments from Intel, a vendor, to create "cookie-jar reserves" that concealed financial shortfalls. From 2002 to 2006, Intel’s payments were misrepresented as rebates, then diverted to boost Dell’s earnings when operating results fell short. Dell paid a $100 million penalty; Michael Dell, $4 million.
Vendor Credits Are Again at Issue
In its 8-K and earnings release of 27-Feb-2025, Dell Technologies said during the fourth quarter of fiscal 2025, it discovered accumulated credits from suppliers – vendors – that were not recorded, or not recorded in the correct period in its previously reported financial results. Dell said the error overstated cost of goods sold by approximately $200 million in fiscal 2024 and $148 million in fiscal 2025 for the nine months ended 01-Nov-2024. The total credits at issue was $348 million. That $348 million is about $50 million, or six cents per share “accumulated” for each of the quarters identified.
In 2010, the issue involved a single vendor, Intel. Today Dell says it initiated an investigation, which found that “certain procurement” employees, working with “certain suppliers,” were responsible for the credits, impacting the Client Solutions Group segment.
Those Intel payments grew from about 10% of operating income in FY-2003 to 38% in FY-2006. They peaked in the first quarter of FY-2007, at 76% of operating income, over $700 million. By comparison, the $348 million in vendor credits at issue today is smaller, sure. An extra six cents per share, accumulated each quarter? That is meaningful.
An Undisclosed SEC Investigation
Early signal of a possible SEC investigation at Dell was received on 07-Jan-2025. On 02-May-2025, we learned of three SEC investigations in recent periods Two are closed, one was still ongoing, and undisclosed as of 02-May-2025.
Ineffective Internal Controls - This is New
Per the 10-Q filed 10-Dec-2024, disclosure controls were declared effective, as of 01-Nov-2024. However, in its 8-K of 27-Feb-2025, Dell said its internal controls were declared ineffective due to issues tied to the adjustment, as of 31-Jan-2025. Per that 8-K filed 27-Feb-2025 –
The material weakness relates to the approval, communication, and recording of non-recurring credits owed from certain suppliers. The material weakness is the result of deficiencies in the design and implementation of controls over certain non-recurring credits owed from suppliers.
Per the 10-Q filed 10-Jun-2025, we see some internal controls progress, but they were still not effective, as of 02-May-2025.
DI's Take
Dell’s accounting problems have our spider senses tingling, and not in a good way. The “Revision of Previously Issued Financial Statements” narrative feels a bit too tidy, with many gaps upon closer look. Meanwhile, the earnings calls are gushing with AI-euphoria. Who cares about some pesky, arcane, accounting adjustment when you’ve got a great AI story!
Here's where we suggest the more thoughtful investor focus –
Is the problem limited to Dell’s Client Solutions Group segment? Given the wide array of vendors, complex supply chains, and reporting requirements, procurement is typically centralized at larger companies. At minimum, procurement policies, practices and protocols are. That suggests this problem may be more widespread than disclosed. The ongoing controls weakness bolsters this thinking.
Procurement employees don’t make accounting entries – so where was the disconnect? And who else knew – and approved – these questionable transactions? We look to the C-suite for answers – or failures here.
The C-Suite and the Board: Critically, what did the C-suite and board know – and when? Given the broader implications for the company, especially margin and EPS impact, one has to wonder if compensation was a factor. If so, to what extent?
Use of round numbers: As we said earlier, that $348 million is about six cents per share “accumulated” in each of the quarters identified. Or, just about $50 million per quarter. Forensic accountants often flag round numbers because they can suggest estimates rather than precise calculations, raising concerns about potential manipulation.
Potential for cookie-jar accounting: $348 million in accumulated credits may not seem meaningful against Dell’s $67.3 billion Cost of Net Revenue in FY-24 alone. But at 6 cents per share, per quarter? It’s certainly meaningful at that level.
Even though the scale is much smaller than the 2010 fraud case, the nature of the vendor credits adjustment still indicates possible cookie-jar accounting, where reserves could be drawn down to smooth earnings. If that’s the case, reserves may now be depleted, thanks to he recent accounting revision —potentially increasing future earnings volatility.SEC follow-up: Make sure to ask Dell what contact it’s had with the SEC’s Division of Enforcement in the last two years. They can tell you if they choose to.
Final Word – Pay Attention to Dell’s Big Systems Upgrade.
Tucked deep within the details of Dell’s efforts to address its internal controls problems, is a disclosure you don’t want to miss, though many likely already have.
Specifically, Dell tells us the company is also in the midst of a meaningful upgrade to its systems.
From the Dell Technologies 10-Q filed on 10-Jun-2025 –
We are in the process of an ongoing business modernization initiative to advance our capabilities, leverage new technology, and optimize business processes to change the way we work and make decisions, improve business outcomes, and reduce costs. As part of this initiative, we are modernizing accounting and finance systems.
Source: Dell Technologies 10-Q filed on 10-Jun-2025
Read that again. Dell’s disclosure tells us that not only does the company have internal controls problems it has yet to fully tame, it is also in the midst of a massive systems upgrade partially aimed at resolving them.
This calls for added diligence and caution with Dell’s story going forward.
Using an SAP project as an example – a leading enterprise software system – seasoned investors have long joked that whenever a company announces a major SAP project, it typically takes twice as long and costs twice as much as management initially estimates. This reflects the well-known complexities and risks involved in large-scale systems upgrades.
In closing, while the AI story is compelling and exciting, it should not distract from the fundamentals. Well-designed and functioning business processes and systems are what enable those new technologies to covert to revenue and earnings. Dell’s shortfalls have been significant enough to cause accounting issues and internal controls weaknesses.
Management needs to provide clear communication on its ongoing business modernization initiative. This includes estimates on costs, timelines, and progress reports. Failing that, we recommend you ask them about it.
– John P. Gavin, CFA, NACD.DC
Addendum: Relevant Dell Technologies Disclosures - Available in PDF, above
Disclosure Insight research provides data, commentary, and analysis on public company interactions with investors and with the SEC. Our work is heavily reliant on company disclosures and our expertise in using the Freedom of Information Act.
This report does not constitute investment advice or an offering to buy, sell or recommend any securities. The information herein is distributed purely as a newsworthy event. All information contained herein is derived from publicly-available disclosures as made by the companies cited in this report, and/or documents obtained from the U.S. Securities and Exchange Commission.
Our Terms of Service, relevant disclosures, and other legal notices can be found here.