For years, Dell Inc. shareholders, the investing public and the markets were told that the company had a superior business model. The company met street expectations quarter after quarter and year after year with such consistency that a skeptical analyst might have wondered about the results. Apparently nobody did.

Dell’s picture perfect results began to unravel in 2007 with an internal investigation and eventually disclosures of wrongful conduct and a restatement. The story took a further turn last month when the company, its founder Michael Dell and others, settled an enforcement action with the SEC. There, the Commission’s complaint focused on a scheme which took place from 2003 through 2007. It concealed the fact that large parts of the company’s revenues came, not from superior products and management, but from payments some might consider anticompetitive – Intel paid Dell not to use the products of a competitor. Whatever the propriety of these payments, investors and the market were entitled to know that a significant portion of Dell’s revenue came from them, not superior management as claimed, according to the Commission.

The company, Mr. Dell and others settled. The settlements were generally based on claimed violations of Securities Act Sections 17(a)(2)&(3), a kind of negligent fraud, and various books and records charges as discussed here. There were, of course, penalties.

On Friday, another chapter in the Dell accounting saga unfolded. Settled enforcement actions were filed against Robert W. Davis and Randall D. Imhoff. SEC v. Davis, Case No. 1:10-cv-01464 (D.D.C. Filed Aug. 2, 2010); SEC v. Imhoff, Case No. 1:10-cv-01465 (D.D.C. Filed Aug. 27, 2010). Mr. Davis, a CPA, served as Dell’s Vice President of Corporate Planning and Reporting beginning in 2001. In November 2002, he was named V.P. of Corporate Finance and Chief Accounting Officer. He held this position until February 2005, when he left the company to become CFO of Computer Associates, Inc. Mr. Imhoff, also a CPA, joined Dell in 2000 as Corporate Assistant Controller and was named Finance Director for U.S. Small and Medium Business in September 2003. From November 2005 through April 2007 when he left the company he served as Finance Director for Global I/T.

The two complaints, although not identical, essentially detail a scheme to improperly boost revenues and meet street expectations beginning as early as 2001 and continuing through at least 2005. The complaint against Mr. Davis, for example, claims that beginning in fiscal year 2002 and continuing through fiscal year 2005 the company utilized “cookie jar” reserves and other manipulations to achieve its financial objectives. During the period, Dell maintained excess accruals in multiple reserve accounts. Those excess accruals were used to offset the financial statement impact of future expenses. One reserve manipulated was known as the Strategic or “Strat Fund.” It was a subset of account 24990 called “Corporate Contingencies.” Generally, it was used to reduce operating expenses by making releases to cover unforeseen or unplanned expenses. According to the SEC, “Davis planned and issued instructions regarding Dell’s build-up and use of Corporate Contingencies.”

The other reserves manipulated included: 1) Relocation accruals; 2) Corporate restructuring reserve; 3) Several reserves in one of Dell’s overseas business units; 4) Bonus and profit-sharing accruals; and 5) an under-accrued restructuring Las Cimas reserve.

The manipulation of these reserves permitted the improper management of revenue. It also fundamentally altered key metrics and ratios. Dell, for example, highlighted for investors its OpEx ratio – a ratio of operating expenses as a percentage of revenue. The company told investors that the ratio remained flat or continued to “record low” which meant that its cost reduction initiatives and focus on controls was successful. In fact, the ratio varied greatly from period to period when computed with the correct data.

Mr. Davis settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(1) & (2), Exchange Act Section 13(b)(5) and from aiding and abetting violations of Exchange Act Sections 13(a) and 13(b)(2)(A) & (B). He also agreed to disgorge $19,080 along with prejudgment interest and pay a civil fine of $175,000. Mr. Imhoff consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 13(b)(5) and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) &(B). He also agreed to disgorge $12,852 along with prejudgment interest and to pay a civil fine of $25,000. Neither defendant was barred from serving as an officer or director. There is no indication in the papers that either defendant will be barred from practicing before the Commission under Rule 102(e) as an accountant, although it is possible such actions will be filed later.

Reading all of the Dell actions together it is clear, according to the Commission, that shareholders and the markets were furnished with materially inaccurate financial information from as early as 2001 through 2007. Those inaccuracies were bolstered by company and management statements attributing the consistently good results to management expertise and good controls. In 2007, an internal investigation by the company found otherwise. It uncovered the accounting irregularities and wrong doing, disclosure was made and eventually there was a restatement correcting the financial statements. The Commission investigated, found years of wrong accounting, manipulated reserves and incorrect statements, but no intentional fraud.

Note to Readers: After the publication of this article the Commission Litigation Release became available. It states that both defendants consented to the entry of orders under Rule 102(e) which suspend their right to appear and practice before the Commission as an accountant. Mr. Davis can apply for reinstatement after 5 years while Mr. Imhoff can apply after three years. See Litig. Rel. 21634 (Aug. 27, 2010 but not available until Aug. 30, 2010).