HP Logs $8.8 Billion Impairment Charge For Possibly Fraudulent Accounting by AutonomyBy: Sean Patterson - November 20, 2012
Just over one year ago, HP bought Autonomy, an enterprise search and knowledge management service company for $10.2 billion. Today, HP announced it would be taking an $8.8 billion impairment charge due to what it calls “serious accounting improprieties, misrepresentations, and disclosure failures” at Autonomy prior to HP’s acquisition of the company.
HP stated that it discovered the fraudulent accounting practices during an internal investigation and forensic review into Autonomy’s accounting practices before the 2011 acquisition. It claims more than $5 billion of the impairment charge is linked to the Autonomy accounting.
HP’s statement on the matter:
“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. 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. We remain 100 percent committed to Autonomy and its industry-leading technology.”
The investigation into Autonomy’s accounting practices commenced after Autonomy founder Mike Lynch left the company. A “senior member” of Autonomy’s leadership stepped forward and blew the whistle on what he or she alleged were “a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP,” and provided details that HP had no knowledge of.
HP stated that its investigation is still ongoing. It provided two examples of the types of accounting improprieties it accuses Autonomy of practicing:
- The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
- The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.
The forensic accounting review was undertaken by PricewaterhouseCoopers under the oversight of John Schultz, HP’s general counsel. HP has referred the matter to the U.S. Securities and Exchange Commission and the U.K.’s Serious Fraud Office. The company is also “preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders.”