updated 09:58 pm EST, Thu December 27, 2012
Improprieties, difference between US, EU accounting to be evaluated
The US Department of Justice has commenced an investigation into reports of accounting fraud at Hewlett-Packard's troubled acquisition, Autonomy. In November, HP had made its own discovery of potential fraud at the software developer, and submitted evidence to federal regulators following a write-down of $8 billion of the value of the company, for which it paid $11 billion a little over a year ago.
According to the filing, "HP has provided information to the UK Serious Fraud Office, the US Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy. On November 21, 2012, representatives of the US Department of Justice advised HP that they had opened an investigation relating to Autonomy. HP is cooperating with the three investigating agencies."
Mike Lynch, the former CEO of Autonomy, has strongly denied allegations by HP that his former company had engaged in "serious accounting improprieties" and willfully misled shareholders regarding its financials. Lynch is reportedly sitting down with former clients of Autonomy in order to sort out the numerous charges HP has leveled against the company and its former management. A good deal of Lynch's protest appears to hinge on differences in accounting standards between American firms and some firms based in other countries.
HP charges that Autonomy was booking licensing revenue upfront before deals had closed, inflating its revenue beyond what the company had actually received. Further, HP says that Autonomy mischaracterized revenue from low-margin hardware sales as software sales. Autonomy would, in the past, sell hardware systems to some customers and take a loss on the sale in exchange for the client agreeing to market some Autonomy products. These transactions were charged as marketing expenses, and Lynch maintains that they accounted for less than two percent of total revenues.
Under the International Financial Reporting Standards -- devised by the International Accounting Standards Board -- such practices are relatively common. Companies operating under IFRS can recognize such sales as revenue if they are delivered in the current period with probable collection, a fixed and determinable fee, and no right of return policy. Under the Generally Accepted Accounting Principles commonly used in US firms, the sale must be completed before it can be claimed as revenue.
Accountants Deloitte and KPMG are being sued over their purported role in Hewlett-Packard's acquisition of Autonomy. Both accounting agencies have denied responsibility for potentially overvaluing Autonomy prior to HP's acquisition.