Following HP's investigation into "serious accounting improprieties" at Autonomy, IT legal experts wonder why these alleged irregularities were not picked up on before.
HP CEO Meg Whitman has admitted that it could take years to unravel the events that led to her firm having to foot an $8.8bn writedown related to its buyout of UK software house Autonomy.
As reported by IT Pro yesterday, the hardware giant claimed it had been forced to swallow a multi-billion dollar impairment charge following the alleged discovery of “serious accounting improprieties” and “disclosure failures” at Autonomy in the lead up to its acquisition by HP last October.
The alleged financial irregularities account for around $5 billion of the $8.8 billion charge, HP has advised, while the remainder relates to recent trades in the company’s stock.
According to HP, these “improprieties” resulted in the Cambridge-based software company being massively overvalued at the time the deal went through, and were brought to its attention by an unidentified whistleblower.
On a conference call with analysts yesterday, Whitman said HP had referred the case to the UK Serious Fraud Office and the US Securities and Exchange Commission (SEC), requesting that both open up criminal and civil investigations into the matter.
The first rule of any acquisition: you go back over the stated revenue and challenge it.
“Our internal investigation is ongoing, but we have turned over the investigation...[and] that process is underway,” said Whitman.
“I think we all know that [with] the legal system in both countries, this will take a long time to work through, but we are committed to seeking redress for the benefit of our shareholders.
“I suspect this is a multi-year journey through the courts in both countries,” she added.
Former Autonomy CEO Mike Lynch, who left the company in May, has already “flatly rejected” HP’s claims.
However, legal experts have questioned why - if “accounting improprieties” did take place - these were not picked up by HP and Autonomy’s tranche of financial advisors during the due diligence phase of the deal.
Also, HP enlisted the help of financial services company Deloitte to vet Autonomy’s finances in the run up to the deal. It also appointed KPMG to run a fine-toothed comb through the work of the latter.
IT Pro contacted Deloitte and KPMG for comment on this article, but both declined.
Adding things up
Nigel Cannings, technical director at IT compliance firm Chase Information Technology Services, used to run the European legal team at enterprise application software firm BEA Systems before it was snapped up by Oracle in 2008. He has overseen dozens of acquisitions over the years, and helped to provide some insight into the HP/Autonomy deal.
Speaking to IT Pro, he said, considering the close scrutiny Autonomy’s finances would have been under in the lead up to the transaction, it is “astonishing” that nothing untoward was picked up.
“It is rule one of any software company acquisition: you go back over the stated revenue and challenge it,” said Cannings.
“It seems quite astonishing that, with the use of reasonable forensic software and a rigorous approach to financial due diligence that a massive mis-statement [like this] would not have been picked up.”