HP calls in Serious Fraud Office over Autonomy acquisition [UPDATED]

By Graeme Burton
20 Nov 2012 View Comments
Dr Mike Lynch is the founder of Autonomy

Hardware giant Hewlett-Packard has called in the Serious Fraud Office (SFO) after uncovering what it claims are accounting irregularities at intelligent-search software vendor Autonomy, which it acquired for $11.1bn (£7bn) in August 2011.

Further reading

The deal, which had been held up while HP underwent one of its periodic changes of CEO, was ultimately approved by new CEO Meg Whitman. Just 15 months after the deal was announced, though, HP has taken a massive $5bn (£3.2bn) write-down on the acquisition. Whitman has vowed to pursue compensation for HP through the civil courts, as well as involving both the SFO in the UK and the Securities and Exchange Commission's (SEC) enforcement division in the US.

In a conference call, CEO Meg Whitman said that the irregularities were only uncovered following the departure of Autonomy founder and former CEO Mike Lynch, when an unnamed senior executive who had stayed on came forward with their concerns over Autonomy's past accounting and revenue recognition practices.

"HP now believes that Autonomy's former management mis-stated Autonomy's financial performance, including its revenue, core growth rate and growth margins, as well as misrepresenting its business mix," said Whitman.

"There appears to have been a wilful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers," she added.

The matter has been referred to both the SEC and SFO, she said, and senior executives at Autonomy will almost certainly be in the line of fire, too. "We are preparing to seek redress against various parties in the appropriate courts to re-coup what we can for our shareholders. We intend to aggressively pursue this matter in the months to come."

Whitman said that HP had undergone a full due diligence process during its acquisition, but had done so relying on audited financials, rather than asking questions about revenue recognition policies and products of Autonomy's management.

Whitman claimed that there were three main ways in which Autonomy misrepresented its sales and financial performance. 

The first was with hardware sales reported as software revenues, with the cost of the hardware booked, in part, as a marketing expense to cover up its relatively low-margins.  

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