HP may have been aware of certain key accounting practices by Autonomy before a whistleblower supposedly stepped forward
HP executives were aware of some of the sales practices of Autonomy that are now at the centre of an accounting dispute, in spite of HP’s claims to the contrary, according to a report by the Financial Times citing audit papers, accounting documents, internal emails and unnamed people familiar with Autonomy’s deals.
HP took a $5 billion (£3bn) writedown on Autonomy in 2012, about a year after it acquired the British company for $11.1bn, claiming it had been misled about the true state of Autonomy’s business. That writedown contributed to an HP quarterly loss of $6.9bn at the time, while Autonomy founder Mike Lynch said HP was using Autonomy as a “scapegoat” for HP’s own failings, and had “mismanaged” Autonomy.
Two of the issues contributing to the writedown, according to HP, include the way that Autonomy’s substantial sales of hardware were accounted for and the accounting for sales made to resellers in which an end customer might not be in sight. These, according to HP’s accusations, were two of the most significant means that Autonomy used to inflate its sales figures in order to attract potential buyers.
HP claims that it was unaware of these issues until a whistleblower came forward in May 2012. However, senior HP executives, including chief executive Meg Whitman, were included in email communications related to these practices, according to the report.
In addition, some of the deals in question were reportedly signed off by Autonomy’s auditors in audit reports that were available to HP management after the acquisition.
Lynch said the FT’s findings support the position of Autonomy’s former management that the company’s accounts were accurate.
“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,” Lynch said in a statement provided to the press in response to the FT’s report. “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.”
HP argues that Autonomy represented its hardware sales as a way of packaging the company’s software in an all-in-one appliance, and that this was their only purpose as far as HP was aware. HP claims it was not aware that Autonomy sold hardware at a loss as a sales and marketing tool.
However, Autonomy’s UK auditor, Deloitte, was aware of the marketing purpose of at least some of the hardware sales, and accepted this as valid, according to the FT, which found Deloitte had flagged this practice as one of Autonomy’s “key risks” in an audit report. Large hardware sales were “routinely” acknowledged in Autonomy’s audit reports, the paper claims.
Deloitte also allegedly wrote in the report that it “accepted decision of management to allocate [hardware costs] to sales and marketing”.
An audit report from December 2010 was also cited, saying 9 percent of Autonomy’s sales were hardware, not far from the figure of 10 to 15 percent which HP later said showed how misleading Autonomy’s accounts had been. Deloitte told the FT it “categorically denies” knowledge of any accounting improprieties or misrepresentations in Autonomy’s financial statements.
An October 2011 email to HP chief executive Meg Whitman which discussed the sale of hardware, as well as other exchanges of emails involving HP management in which hardware sales were discussed.
While HP would not comment to the FT on the timing of when it became aware of Autonomy’s hardware sales, the company said that it was not the existence of the sales which was relevant, but rather their purpose and the way in which Autonomy represented this in its accounting. It was this purpose which the whistleblower flagged to HP, according to the company.
“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,” HP said in a statement to the FT.
Sales to resellers
HP executives were included in emails prior to May 2012 which discussed deals in which substantial revenues were derived from sales to resellers, according to the FT. HP later accused Autonomy of using such deals as a way to inflate its revenues.
For example, an exchange of emails dating from February 2012 and including an HP executive regarding such a sale worth $10.2m. Other such email exchanges involving HP executives also exist dating from the period after HP bought Autonomy and before the whistleblower allegedly stepped forward.
However, an unnamed person familiar with the discussions told the FT that these discussions only showed that Autonomy was adjusting to US accounting rules, which handle sales to resellers differently from the international accounting rules Autonomy had previously been using.
HP’s allegations against Autonomy are being investigated by the US Department of Justice and the UK’s Serious Fraud Office, while HP and its directors are being sued by shareholders for allegedly ignoring red flags on Autonomy’s accounts.
In a financial filing earlier this month HP cut Autonomy’s reported profits by 81 percent for 2010, the year before HP bought it, reducing the profits for the year from £106 million to £19 million. The former Autonomy management team said at the time that the filing had not yet been signed off by auditors and said the figures involved were small compared to HP’s later writedown.