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HP: we were fooled into paying billions too much for UK software co

One of the biggest scandals in tech industry history is unfolding today. HP says it was fooled into paying billions over the odds for Autonomy, a UK software company.

The US giant bought Autonomy, a maker of business information management software, for $US11 billion in October last year.

Now it says it was duped.

"There appears to have been a willful sustained effort" to inflate Autonomy's revenue and profitability, HP chief executive Meg Whitman told media today. "This was designed to be hidden."

HP November 20, HP made $US12 billion in write-downs, $US5 billion directly associated with the Autonomy acquisition. 

The write-downs pushed the company to a huge third-quarter loss (the company slipped $US12.7 billion into the red on $US120 billion revenue against a year-ago quarterly profit of $US8.3 billion on $US118 billion turnover). 

In a video interview with the Wall Street Journal, Autonomy founder Mike Lynch said he did not know th accusation was coming, and calls it "utterly wrong."

In a statement, HP said was alerted to irregularities when a senior member of Autonomy's leadership team came forward.

It commissioned a forensic accounting investigation - carried out by PwC - which found "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.

"These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal."

Forbes dryly noted "That's PR-speak for fraud."

Blame game
Autonomy boss Mr Lynch told the Wall Street Journal his managment team relied on the company's auditor, Deloitte, to get things right.

Ms Whitman in turn told CNBC that HP depended on Deloitte's audited financial statements.

For its part, Deloitte has issued a statement saying, "Deloitte UK categorically denies that it had any knowledge of any accounting improprieties or any misrepresentations in Autonomy's financial statements, or that it was complicit in any accounting improprieties or misrepresentations."

According to a Wall Street Journal analysis of HP's accusations against Autonomy, the UK company was:

Selling some hardware at a loss. During a period of about eight quarters prior to HP’s acquisition, Autonomy sold some hardware products that had a very low margin or on which it may have even taken a loss. It then allegedly turned around and booked those hardware sales as high-margin software sales. At least some portion of the cost on these products, Whitman said, was booked as a marketing expense, not as cost of goods sold.

There’s a second piece of the puzzle, where HP says that Autonomy was selling software to value-added resellers — the middlemen in so many technology transactions — in which there are ultimately no end users. That, too, inflated apparent revenue.

Third, there were some long-term hosting deals — essentially, Autonomy hosting applications for its customers on a subscription basis — that were converted to short-term licensing deals. Future revenue for software subscriptions — that should have been deferred or recorded as coming in the future but not yet booked — were stripped out and booked all at once.

Forbes asks, "So, why would it be hard to prove Deloitte missed something big and should be held accountable? It would be easier if auditors, as an industry, agreed it was their responsibility to detect fraud and material misstatements of the financial statements."

HP's own auditor, Ernst & Young, audited and signed off on HP's annual result (including the Autonomy deal) on December 14.

The FBI is now looking into the allegations, according to a Reuters report citing an un-named source. The agency has yet to make any public comment.

Comments and questions
9

Relied on audited financials to make an acquisition this size? Didn't HP do a due diligence? Beggars belief!

HP is not very bright.

Ha ha ha ha ha ha ha ha ha ha.LOL!
What a bunch of cry babies! Due dilligance? None done so where does the blame lie?

Yes buyer beware. Trusting audited financials!!! joke

The comments here are soooo predictable.
It is never the criminals that are criticised, but rather it is always the screwed that are to blame and are at fault for trusting auditors and sellers.
Some of you peeps really should try working for a living and at least try to replace something of what you consume.

Anyone remember how HP bought Compaq? That was another subsequent blame game. Seems to me HP never learnt.

Yep, and Palm. Paying through the nose then realised they don't know much about the companies business and market.

The reality is HP has had a seriously disfunctional board - they have made a string of ill advised decisions- namley the hiring of Leo Apotheker. The blame should lie sqaurley on the ChairmanRay Lane, who has been complicit in all of the poor strategic and hiring decisions.....including the sacking of Mark Hurd..

Who would be a commodity supplier, Dell, HP all being put to the sword. The only "IP" is the processor and INTEL used every bit of their market power to crush AMD. The only processor company who seem to be ok for now is ARM in almost every mobile phone.

It will be interesting to see if Apple can come out of the next decade as the first or second biggest company by capitalization in the world. Probably not.