New Details Emerge in HP-Autonomy Accounting Scandal
More shots were fired in the ongoing saga concerning how computing giant Hewlett-Packard came to acquire the British software firm Autonomy in 2011, a deal which the technology giant has since said it overpaid on by about $5 billion.
A story in the Financial Times (subscription required) goes into some new detail concerning the alleged accounting improprieties of which HP has accused Autonomy’s former management team, including its ex-CEO Mike Lynch.
The story revisits, with some new detail, how Autonomy treated revenue derived from hardware sales on its books in the quarters leading up to its acquisition. HP has long maintained Autonomy had padded its revenue numbers with sales of computer hardware and then accounted for the sales as software, a practice that is prohibited under U.S. accounting rules. The story now raises new questions about HP’s interpretation of events. The story also noted that Autonomy’s auditor, Deloitte, continues to stand by the work it did on Autonomy’s books.
HP alleged in November of 2012, when it referred the matter to regulators in the U.S. and the United Kingdom, that Autonomy had overstated its value in part by mischaracterizing sales of computer hardware as software. Most of an $8.8 billion write-down that HP took that month was related to Autonomy.
The story is the latest development in the evolving set of competing narratives about the circumstances leading up to the deal. Lynch, in a statement issued through a spokeswoman, said the FT’s account vindicates him:
“Meg Whitman accused Autonomy of ‘active concealment,’ but these revelations prove we were open and transparent with our auditors who continue to stand by the accounts. Meg Whitman must answer to her shareholders with what she knew, when she knew it and how she and her senior colleagues made such factually incorrect and serious statements that were so easy to check from the audit packs. Why would Meg say we had withheld information from our auditors? She should explain or resign.”
Lynch went into further detail with a statement on his Autonomy Accounts site, in which he argues that HP essentially failed to properly manage Autonomy after it closed the deal to buy it.
“There is another explanation for the failure of Autonomy to meet the financial expectations in place at the time of its takeover by HP,” he wrote. “It is entirely to do with HP’s failure to properly integrate the company it bought. That failure became clear early in the process and is recorded in the documents revealed today.”
HP disagreed with this assessment, via a statement from spokesman Howard Clabo:
“While HP eventually learned that a portion of Autonomy’s revenues were related to hardware sales, we knew nothing of the accounting improprieties, misrepresentations and disclosure failures related to such sales until after a senior Autonomy executive came forward and HP conducted an extensive investigation. Our investigation has shown that Autonomy often resold generic hardware at a loss in the last few days of the quarter with the sole purpose of masking its real financial performance.
“In addition, Autonomy engaged in improper transactions with certain value-added resellers to create the appearance of software licensing revenue at the end of each quarter. In some instances, these transactions were used to accelerate revenue, and on numerous occasions, these were fabricated transactions with no real end-user,” Clabo said.
If you’re still having trouble getting your head around the allegations, the FT went into excruciating detail on one particular December 31, 2009, Autonomy deal with investment bank Morgan Stanley that it noted was “typical of the lossmaking hardware deals it said it used to strengthen ties with important customers.” Facing the end of its fiscal year, the FT reported, Autonomy recorded $4.8 million in sales of hardware to a U.S.-based reseller, MicroTech, with Morgan Stanley as the intended end customer. This occurred after Autonomy failed to close a deal to sell the same hardware with Autonomy software installed on it to Morgan directly, said the FT.
Since the entire accounting scandal erupted 15 months ago, HP has maintained that this is one of the ways that Autonomy made itself appear to be more valuable than it was when HP — then under its former CEO Léo Apotheker — decided to pay $11 billion to buy it. Lynch has long maintained that the size of the improprieties HP has pointed out don’t add up to a $5 billion write-down and that many of the discrepancies can be explained by differences in the accounting standards in the U.S. and in Britain.
There have been other allegations like this concerning Autonomy. The U.S. Air Force accused the company of making what it called “round trip” transactions involving a third party — MicroTech again — in order to boost sales on its books. It briefly considered a debarment action against Lynch and other former Autonomy executives, but ultimately decided against it.
HP is also facing a shareholder lawsuit on the issue, and a federal judge in California ruled late last year that HP will have to answer questions about the mess in open court.
And there’s still a lot to be disclosed. The U.S. Department of Justice and the Securities and Exchange Commission are both investigating the deal, as is the Serious Fraud Office in the United Kingdom. And, about a year ago, Lynch had reportedly retained criminal defense attorneys.