Channel stuffing, inflated sales, round-trips and back-dated contracts were some of the fraudulent accounting tricks used by Autonomy’s prison-bound former CFO.
The former chief financial officer of software company Autonomy has been jailed for five years after a US jury found him guilty of massive accounting fraud in the $11.1bn (£8.5bn) sale of the British firm to Hewlett-Packard in 2011.
Sushovan Hussain was also fined $4m (£3.10m) and ordered to forfeit $6.1m (£4.73m) in a sentence handed down by US district judge Charles Breyer in San Francisco on Monday. Hussain has denied wrongdoing and plans to appeal the decision, his lawyers said.
The court heard two years prior to the sale Hussain, a UK citizen, used sophisticated accounting methods to falsely inflate Autonomy’s revenues to make it appear the business was growing when it was not.
Alongside other forms of accounting fraud, Hussain used back-dated contracts, round-trips where purchases were invented to pay money to companies which then returned it to Autonomy to cover fictitious sales, and channel stuffing, whereby the firm deliberately sent distribution retailers more products than they could sell to the public to falsify sale data.
The fraud artificially inflated Autonomy’s publicly-reported revenues by as much as 14.6% in 2009, 17.9% in 2010, 21.5% in the first quarter of 2011, and 12.4% in the second quarter of 2011.
In addition, Hussain and his co-conspirators fraudulently concealed from investors and market analysts the scale of Autonomy’s hardware sales, which were used to boost the company’s reported revenue, prosecutors said.
Evidence showed Autonomy's sales were inflated by $53.3m (£41.3m) in 2009, $99.08m (£76.77m) in 2010, $20.09m (£15.57) in the first quarter of 2011 and $20.85m (£16.15) in the second quarter of 2011.
In its annual reports, Autonomy stated it had prepared its financial statements in accordance with International Financial Reporting Standards, and in particular, the accounting requirements for revenue recognition.
The reports showed healthy revenues and high gross margins. When the acquisition was announced, Hewlett-Packard highlighted Autonomy’s strong financial performance, stating Autonomy had “a consistent track record of double-digit revenue growth, with 87% gross margins and 43% operating margins in 2010”.
Hussain executed the fraud in order to attract potential buyers, US prosecutors claimed.
US Department of Justice prosecuting attorneys wanted a 12-year prison term, while Hussain’s lawyers argued for no more than one year and one day. Both sides agreed on the fine.
“As we have consistently maintained, Hussain engaged in outright fraud and deliberately misled the market about non-existent sales through a series of calculated sham transactions,” said Hewlett-Packard in a statement to media.
The firm said Autonomy manipulated its revenue and quarterly results, making an accurate valuation impossible.
“That Hussain attempted to depict the fraud as nothing more than a misunderstanding of international accounting rules was, and still remains, penitently ridiculous – and he has now been held accountable for his role in defrauding HP,” a spokesman for Hewlett-Packard added.
Decision labelled 'good news' for investors
The decision to jail Hussain was labelled “good news” by IT consultant and former chairman of the UK Individual Shareholders Society, Roger Lawson.
Lawson called for the UK to take on more cases of a similarly high-profile nature so as to “deter manipulation of accounts that is so prevalent and so damaging to investors”.
“The sad thing is that we rarely see such cases pursued to criminal convictions in the UK, whether they are large or small companies”, he said.
Lawson also highlighted Autonomy’s bundling of hardware and software sales as solely software as a common aspect of accounting fraud, as software sales are priced much higher than hardware in company valuations.
The defendants claimed some of the disputed differences were down to different accounting standards, namely US GAAP versus IFRS, an argument Lawson said would clearly not stand up to scrutiny.
UK action put on ice
Britain’s accounting regulator, the Financial Reporting Council (FRC), put formal complaints against Hussain and Chamberlain on ice until the conclusion of the criminal charges against the pair. The FRC said it will wait until the outcome of Hussain’s appeal to take any action.
Hussain was convicted in April 2018 on 16 wire fraud, securities fraud and conspiracy counts.
Hussain and Autonomy’s former chief executive Mike Lynch are also defendants in a $5bn civil fraud trial which began in London’s high court in March, where Hewlett-Packard claimed they caused it to overpay for Autonomy by fraudulently inflating its value. That trial is expected to last several months.
Former Hewlett-Packard chief executive Léo Apotheker had made Autonomy central to plans to integrate his company’s computer and printer businesses with higher-margin software. The plan failed and Hewlett-Packard took an $8.8bn write-down in 2012, a year after buying the firm. It later accused Lynch, who founded Autonomy, of accounting fraud.
Hewlett-Packard split in 2015 into HP Inc and Hewlett-Packard Enterprise Co., and in 2017, the latter spun off much of its software business.
US prosecutors have also criminally charged Lynch and the former Autonomy vice president of finance Stephen Chamberlain over the Hewlett-Packard acquisition. Lynch, via his lawyers, has denied criminal wrongdoing and blamed the acquisition’s failure on Hewlett-Packard. Chamberlain has pleaded not guilty.