The text talks about the case of Dell receiving payments from Intel in return for a pledge by Dell that they would not use computer chips from a major Intel competitor (AMD). The payments were large, covering between 10% and 76% of operating income over the 2002-2006 period. The SEC complaint is that the amounts should have been separately disclosed and treated as a reduction of cost of goods sold because the payments could end at any time-and did end when Dell started to use AMD as a supplier. Outside of the financial statements, in management's discussion and analysis, Dell management attributed the decline in earnings to slowing demand and pricing pressures. The SEC case raises important issues that should cause you to think about the scope of the audit. In a small group, discuss the following questions:
Required
a. Why was Dell's recording and disclosure of the payments from Intel materially false and misleading?
b. What changes in the economic environment, or in the management culture of Dell, might have led PwC to become more skeptical of the company and therefore to expand audit procedures?
c. Should using audit software to identify significant cash receipts from vendors be a normal part of every audit engagement? Explain your rationale and consider such things as audit cost and expectations of the audit.
d. Assume that instead of negotiating payments from Intel that Dell would have negotiated a long-term supply contract with Intel that resulted in lower prices for Intel chips as long as Dell agreed not to use a competitor's chips in its products. Should the amount of the price reduction be disclosed as a separate item in the financial statements under GAAP? Why or why not?
e. Assume the company negotiated lower prices with Intel as described in part D. How would the auditor become aware of the lower prices? Consider that, especially in these tougher economic times, almost all companies are negotiating lower prices from their suppliers.
f. Assume the role of the concurring partner. What kinds of review and analysis might have alerted you to the size and nature of the Intel payments?
g. Considering this case and the many ways in which the payments (or price reductions) from Intel could have occurred, how would you decide that the judgments and decisions made by management moves from "aggressive accounting" to "fraud"?