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Dell (DELL) announced yesterday that it is delaying the filing of its 10-Q due to the expansion of an informal investigation by the SEC into “the possibility of misstatements in prior period financial reports, including issues relating to accruals, reserves and other balance sheet items that may affect the company’s previously reported financial results.”

That’s quite a bit of territory for an investigation to cover. And there’s very little description given about the issues being investigated. What can we surmise? Well, in a company selling millions of computers and peripherals, sensitive “accruals and reserves” might relate to warranties, for sure. That’s especially sensitive when laptop batteries start catching fire; so events of the last few weeks alone might prop up investigators’ curiosity. But that wouldn’t be enough by itself, I suspect. It’s way too early for any warranty misreporting to show up yet; you’d be more likely to expect an investigation if the company never missed a beat in its earnings after such an unexpected wave of warranties, and that’s not happening yet. The recall just began in the current quarter, not the one that’s the subject of the late filing.

What else? We know the company was already the subject of an SEC investigation for its revenue accounting; maybe that’s tied into the new discussion on “accruals and reserves.” Accruals and reserves could very well relate to allowances for sales returns, which is part and parcel of revenue recognition - just like allowances for doubtful accounts. It also could relate to the way Dell accounts for extended services, like additional warranty coverage and tech support services.

What the 8-K and press release don’t say: that there’s an investigation of the company’s stock option practices. Curiously though, it mentioned that the “SEC requests for information have been joined by a similar request from the United States Attorney for the Southern District of New York, who has subpoenaed documents related to the company’s financial reporting from 2002 to the present.”

The only similar thing these two organizations have been working on that’s in the public domain has been stock option backdating cases; apparently, Dell is letting outsiders do their own dot-connecting. They could have been a bit more specific than just saying the U.S. Attorney’s office request “related to the company’s financial reporting.” (It does seem to be what the U.S. Attorney’s office is interested in these days when it comes to the tech sector, doesn’t it?)

One other curious thing: while Dell stopped its buyback plans and cancelled its “analyst day,” it didn’t issue a non-reliance warning on any particular set of financials as we’ve seen so often this year. Optimists might take that as a sign that nothing’s wrong. The investigation is still quite young, however; it’s more likely that the issues being explored don’t have enough certain “dimensions” to warrant a non-reliance warning. If everything found so far was hunky-dory, the informal investigation would be cancelled. Obviously, expansion of the investigation indicates that things aren’t very clear yet and a non-reliance warning might yet be coming.

Source: Playing Connect-the-Dots with Dell