HP accuses Autonomy of false accounting

 

Hewlett-Packard has accused its acquired UK subsidiary Autonomy of accounting improprieties following a write-down of $8.8bn on its $11bn acquisition. 

HP published its fourth quarter earnings today, citing Autonomy's "accounting improprieties and disclosure failures" as the reason for its $6.85 quarterly loss.

HP called in KMPG to conduct due diligence work before the acquisition, effectively reviewing Deloitte's auditing of Autonomy, but both Big Four firms failed to spot any accounting errors.

The company acquired Autonomy in 2011 in a £7.1bn deal, which saw its chief executive Mike Lynch pocket around £500m. 

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Comments
essex accountant's picture

due diligence

essex accountant | | Permalink

Wasn't due diligence done by HP before they bought the shares?

memyself-eye's picture

Due it may have been    1 thanks

memyself-eye | | Permalink

Diligent it seems not (have to be careful lest I end up 'twittered')

So that's KPMG, Deloittes and Price Waterhouse have all pored over the numbers - that only leaves Ernst and Young to have a bash!

carnmores's picture

i think its all going to come down to    1 thanks

carnmores | | Permalink

the fact that 50% of the staff have left and contracts with them - culture clash

yes it was

david5541 | | Permalink

but because of the time of the acquisition of autonomy, there was alot of aggressive accepted accounting techniques/polcices around and it did not take much as a tin pot growth company with software that had a USP to use such accounting policies. and true and fair is not a judgment of value only accuracy. 

kpmg were the dudes here

david5541 | | Permalink

what was said in accountancy age

david5541 | | Permalink

"HP is extremely disappointed to find that some former members of Autonomy's management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP," it said in a statement to investors.

"These efforts appear to have been a wilful effort to mislead investors and potential buyers, and severely impacted HP management's ability to fairly value Autonomy at the time of the deal. We remain 100% committed to Autonomy and its industry-leading technology."

A non-cash impairment charge of $8.8bn related to Autonomy was announced in HP's Q4 2012 statement. More than $5bn is linked to the accounting misrepresentations discovered during the investigation. The balance related to the trading of HP stock and a revaluation of autonomy's future performance – and the synergies from the deal.

An example given by HP of the misrepresentations include negative-margin hardware sales mis-described as ‘license revenue', which affected future growth calculations. These negative-margin sales are estimated to represent 10%-15% of Autonomy's revenues.

The Securities and Exchange Commission, and the Serious Fraud Office, have been notified of the issue by HP. 

carnmores's picture

@David

carnmores | | Permalink

you seem to think you know a lot about this , HOW?

the article states

The balance related to the trading of HP stock and a revaluation of autonomy's future performance – and the synergies from the deal. YOU CAN READ INTO THIS WHAT YOU LIKE ITS ABOUT AS CLEAR AS WHAT HP INTIMATE AUTONOMYS REPORTING TO BE.

An example given by HP of the misrepresentations include negative-margin hardware sales mis-described as ‘license revenue', which affected future growth calculations. These negative-margin sales are estimated to represent 10%-15% of Autonomy's revenues.

 

IF YOU ARE SELLING  HARDWARE WITH SOFTWARE THE PRICING MODEL IS CRUCIAL AND THERE ARE A NUMBER OF ACCEPTABLE SOLUTIONS

THE REAL PROBLEM  RE REVENNUE APPEARS TO BE THE HUGE TURNOVER IN STAFF AND THE MANAGEMENT CULTURE CLASH (YET AGAIN)

 WE SHALL SEE WHETHER THIS IS A GENUINE COMPLAINT OR PART OF THE PLAN TO BLAME THE PREVIOUS HP CEO AND ADVISERS AND GET CASH BACK

My money is on a culture clash

Paul_S | | Permalink

carnmores wrote:

the fact that 50% of the staff have left and contracts with them - culture clash

Having witnessed several takeovers of UK companies by US companies, there is indeed a culture clash.

In my experience the MD and other key staff will often agree to stay on after the deal, but are normally gone inside anywhere from 6 months to a year.

Was told at the time of culture clash ...

JC | | Permalink

The example given was that it was the equivalent of a high street motor manufacuturer purchasing an F1 team and then not knowing what to do with it or how to move forward.

HP is/was a lumbering inefficient giant with out-moded highly structured ways which were poles apart from the Autonomy 'free-wheeling' flexible appproach. Trouble was HP tried to impose their rigid stucture on Autonomy and it did not work - hence staff voting with their feet

The skids were under HP long before they bought Autonomy, so the question is - how much of HP claims are genuine and how much is their own 'cover up' to hide their flagging performance?

Facebook float - no difference.

supremetwo | | Permalink

And no massaged accounting in the Facebook float? 

Oh Dear you got to be so careful of the Yanks

philfromleeds | | Permalink

Mike Lynch wether he is honest or not better not stay here in the UK. The Yanks will ask Brittain to send him to them and our government will do that. Go to Monoco Mike. Dont wait GO GO GO

memyself-eye's picture

As an act of British solidarity

memyself-eye | | Permalink

I'll stop using my HP12C calculator, my HP colour laser printer and will definitely NOT buy any more of their brown sauce!

If HP is using this as obfuscation...

louisVW4 | | Permalink

...to obscure their flagging performance, it's a very expensive way of doing it!

All of the Big 4 involved in one way or another; 3 of them paid (lots of $) by HP. Share-droppingly bad PR (how much has that wiped off the value?). Likely lots of $m's in legal costs; suing and being sued! Customer Sat impact... the list will go on.

There should be no tricks the folks at HP don't know about the hardware/software business! So, why couldn't they get their DD right?

This sounds like an earlier discussion here about the lack of deep diligence applied by auditors when signing off on their clients' accounts. I don't believe Deloitte couldn't see what's happening. They would have had the history to show how the numbers are stacking up, or not as it now appears.

I'm sure one of you experts on here could have seen through this, if that's what this turns out to be.

HP should never have got into this position. They must carry the lion's share of blame... probably more for ineptitude, but they paid the big boys big bucks to advise them. Could it be they are not actually any good at what they were paid to do? Where's their culpability?

Honesty and USA Big Business

jo1 | | Permalink

Honesty and USA Big Business will never sit side-by-side

Autonomy and DD Audit

j.arbuthnott326 | | Permalink

Autonomy is a UK company if the allegations are true it is a huge indictment on the effectiveness of Audit firms conducting DD and not being able to see the wood for the trees,a basic lack of commercial awareness or worst still being complicit.   

It needs to be investigated it reflects badly on British corporate governance

That said fraud aside, it is buyer beware, someone will be poring over these warranties!

Autonomy

Subhash Kamath | | Permalink

Maybe you & I could put forward our names - I've only got 15 years to retirement - could be a job for life !!!

Who needs auditors?

Paul_S | | Permalink

louisVW4 wrote:
All of the Big 4 involved in one way or another; 3 of them paid (lots of $) by HP. Share-droppingly bad PR (how much has that wiped off the value?).

Taking a step back, Autonomy's Preliminary results for 2010 (source http://en.wikipedia.org/wiki/Autonomy_Corporation - see table at top RHS; the original has disappeared from the Autonomy web site):

 

Revenue     US$870.4 million (2010)
Operating income     US$316.4 million (2010)
Net income     US$217.3 million (2010)

 

I just don't see how it could be worth so many billions in the first place.