Dell's Intel Bias Caused By Under the Table Cash?

swschrad writes "There's a story up on Reuters today saying Dell faces a class-action lawsuit for finagling the books to hide under-table money from Intel. The hidden cash, up to a quarter-billion dollars a quarter, is alleged to have been paid to keep competing CPUs out of Dell PCs. Dell, their accountants at PriceWaterhouse, company founder Michael Dell, and former CEO Kevin Rollins are all avoiding comment on the pending litigation."

Re:Only Intel?

[rob1980]

You have. My brother just bought a new Dell with an Athlon 64 in it a couple of weeks ago, in fact.

Re:under the table?

[MindStalker]

Yea but a publicly traded company has to reveal income. If Intel was actually giving them cash instead of just lowering their prices then this income has to be accounted for legally

Big deals sometimes have provisions

[alexhmit01]

One way in which a monopolist controls the market is with public price matching. For example, if Intel publishes all their pricing, and guarantees that anyone going exclusively Intel will not pay more than say, Dell, then if Intel drops the price to Dell, they have to refund money to other all-Intel shops... perhaps Apple or other players that agreed to go all Intel to get price breaks.

If Intel gives Dell a 250m rebate, then they are actually charging below the price, and would have to match it elsewhere. However, by hiding the rebate, they can keep charging Dell a book value and collecting the premium elsewhere.

When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

This isn't a local computer shop contracting with a wholesaler, these are two Fortune 50 companies, sometimes they have arrangements covering them.

Also, what if a state government agreed to a deal where Dell was the exclusive provider in exchange for cost-plus accounting. Dell would bill on the reported cost, plus profit margin, and then collect the rebate.

There are a bunch of reasons why this might be illegal because it is potentially defrauding other companies IF their deals are dependent on Intel or Dell's pricing structure.

Financial records are private

[donutello]

Financial statements are public and they never include per-unit prices for raw materials and parts. They include a lump sum "Cost of Goods Sold" which includes the total price for all raw materials and parts consumed per business (if it's broken down that way). If Dell is worried that other companies can read their financial records they have more serious problems to worry about.

Re:Anti-dumping laws

[udderly]

It's called predatory pricing [wikipedia.org]. Mainly it's when a larger company with more marketshare prices their products below profitability in order to bankrupt their competitor.

It's one of the main reasons that straight free markets don't work.

Re:Big deals sometimes have provisions

[qaqa]

When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

In my experience as an accountant, I have seen several such contracts too.

1) Even if Intel had entered into such contracts,Intel would only be guilty of breach of contract and would be liable for damages. It would still not be an illegal act

2) Even if Intel has violated anti-trust laws, Intel would be liable and not Dell.

3) Rebates are sometimes given in the form of cash instead of lowering prices because they are dependant upon reaching target volumes which can be determined only at the period end.

4) GAAP does not require rebates to be separately disclosed. It is perfectly correct accounting to account for such rebates as a reduction from purchase cost. In fact, if they didnt do so, they would be overvaluing their inventory, thus inflating profits!

From the limited information available from the Reuters article, I fail to see the justification for the class action lawsuit.

Re:Lerach is a noted scum-sucking bottom feeder

[Anonymous Coward]

Er, most lawsuits don't go to trial, because it's often much cheaper to settle than to go to court. The courts are structured so as to encourage parties to settle. That's not legal extortion, it's good business sense for both sides.

Re:What's artificial about the profits?

[qaqa]

I certainly agree with your point that if the "kickbacks" were classed as revenue, it would amount to incorrect accounting.This is a very basic and common inventory valuation issue. If inventory was actually valued gross of rebates, the entire accounting team along with the auditors ought to be fired.

However, there are certainly some practical problems. Problems arise when the rebate is based on full-year purchases and during the early quarters there is no way to know with any certainty whether the rebates will actually be realised. Accountants would then have to use judgement and the "principle of prudence" when accounting for the rebate. In effect, this would lead to rebates being spread unevenly across quarters depending upon the likelihood of receipt of the same.

I do have one query though. How did you determine that the "kickbacks" were classed as revenue and not as a deduction from COGS? Is there a separate line-item in the financials under the head revenue?

Just to clarify, I used to words "revenue receipt" to distinguish it from a non-income statement "capital receipt". I did not actually mean that it must be classified as revenue.