If you thought that the various investigations into allegations of accounting fraud at Autonomy, the British software firm that Hewlett-Packard so infamously acquired in 2011, had faded away and been forgotten — you were wrong.
An investigation by the U.S. Air Force into alleged accounting irregularities at a company that does a lot of business with the government has shed some light on what appears to have been “round trip” transactions with Autonomy before it became part of HP.
The investigation was reported first by the Washington Post on Jan. 3. Now the original letter from the Air Force laying out the allegations against the government contractor, a Virginia-based software firm called MicroTech, has come to light. The letter seeks to have the company plus several former Autonomy executives debarred, or prevented from receiving any more federal government contracts. (You can read the whole thing below.)
MicroTech’s role in the deal was apparently to resell Autonomy’s software, which is one of the main ways Autonomy did business around the world.
The Air Force’s main allegation stems from Autonomy’s effort to win a 10-year, $106 million contract with an agency identified only as “Entity A.” In going after the deal, MicroTech executed an agreement to sell $11 million worth of Autonomy software to that agency, which Autonomy then recognized as revenue. Ultimately the Air Force concluded that the deal was never consummated because someone else won the contract.
Either way, when an outside auditor raised questions about a receivable sitting on MicroTech’s books, Autonomy, the Air Force says, wired $9.6 million to MicroTech, which in turn wired it right back, and Autonomy booked the payment as revenue.
In other cases, the Air Force says, Autonomy resold hardware at a loss to its end customers, allowing it to boost its revenue and make up gaps in end-of-the-quarter sales goals.
The allegations by the Air Force pretty clearly mirror the claims brought to light by HP after it recorded an $8.8 billion write-off in late 2012, most of which was attributed to reducing the value of Autonomy. It paid about $11 billion to acquire the company in 2011, in a deal that in the end cost HP’s then-CEO Leo Apotheker his job.
Autonomy founder Mike Lynch has repeatedly disputed claims against how he ran the company, asserting that most of it can be attributed to differences in accounting standards used in the U.S. and the United Kingdom.
Like most U.S.-based companies, HP followed GAAP, the Generally Accepted Accounting Principles put out by the U.S.-based non-profit Financial Accounting Standards Board. As a U.K. company, Autonomy had adhered instead to the International Financial Reporting Standards maintained by the International Accounting Standards Committee.
In the past, Lynch has said that differences in how revenue is recognized under the two systems leave a lot of wiggle room for interpretation of some of the techniques that HP said were used to inflate Autonomy’s value. For example, when a company bundles the cost of a software license, service and support into a single ongoing contract, GAAP accounting rules are more strict than IFRS rules regarding how the payments are booked.
Lynch has in the past also acknowledged that, at least some of the time, Autonomy did sell desktop machines with Autonomy software installed at a loss. He went on to explain that in those cases, the customer would agree to help Autonomy market its product, and the loss was recorded as a marketing expense. When it first brought its complaints to light, HP said that these hardware sales inflated Autonomy’s revenue by as much as 10 percent to 15 percent prior to the acquisition.
In a statement issued on a website that Lynch has created to address all this, he basically repeated those claims. “Autonomy was fully transparent with its auditors and correctly represented its accounts. Autonomy’s transactions were entirely properly accounted for under IFRS and reviewed by Autonomy’s auditors as appropriate.”
HP also issued a statement via a spokesman: “It is patently ridiculous to continue to claim that these very serious allegations, currently the subject of investigation by both the U.S. Department of Justice and the U.K.’s Serious Fraud Office, are merely the result of a ‘misunderstanding’ in the difference between U.S. GAAP and IFRS accounting rules. … The writedown by HP was primarily due to pre-acquisition accounting improprieties, disclosure failure and misrepresentations by former Autonomy senior management.”
Lynch also said that HP has yet to make a detailed accounting of its allegations. “A year on from HP’s initial allegations, despite repeated requests we have still not received detailed allegations or the supporting evidence for them. Rather what we see from HP is unsupported accusations, leaks and PR spin rather than a direct conversation based on the facts.” That may change soon as a federal judge in California hearing a shareholder lawsuit against HP has set a Jan. 17 deadline for the company to submit information about its internal investigation.
Anyway, here’s the Air Force’s letter. Expect to hear a lot more about HP and the Autonomy deal in the coming weeks.