4 Feb 2014 11:18am

HP outlines Autonomy "accounting improprieties"

Autonomy mis-stated its profits by over 80% before its sale, according to HP

Autonomy, which was bought by HP for £6.7bn in October 2011, became the centre of an international accounting scandal in November 2012, when HP accused the former management of “accounting improprieties”. HP claimed the firm had misled them about its financial health, which led it to make a $5bn write off.

According to revised accounts filed by HP in the UK on Friday, the British software company allegedly inflated its revenue and profit by as much as 81%. It reported profit after tax of £105.7m in 2010, but newly restated accounts have revised the figure down to £19.6m. HP also restated Autonomy’s revenue for 2010 from £175.6m to £81.3m.

The accounts are for Autonomy Systems (ASL), which HP said accounted for the majority of Autonomy’s UK business. This is the first time HP has detailed its allegations.

"These restatements, and the reasons for them, are consistent with HP's previous disclosures regarding accounting improprieties in Autonomy's pre-acquisition financials," HP said in a statement released on Monday. "The substantial work necessary to prepare these accounts has revealed extensive accounting errors and misrepresentations in the previously issued 2010 audited financial statements, including the exact problems previously identified by HP."

The former Autonomy management team responded with a statement, denying the allegations. "We continue to reject these allegations by HP," the statement said. "Given the size of HP's writedown, we are very surprised by the small size of the adjustments in ASL that are attributed to the ongoing accounting dispute, which represent a few per cent of group revenue. We know even these include revenue that will be recognised at a later time, under HP's new approach."

HP has also filed a £38m tax refund with HMRC. It submitted the claim related to “overpayment of tax” in 2009 and 2010. The Revenue has not yet agreed to settle.

The ongoing scandal came to the fore again last month when the Washington Post published a US Air Force memo which alleged an American contractor, MicroTechnologies, colluded with Autonomy to inflate revenues. According to the report, the software developer is now in danger of being barred from government contracts.

It resulted in HP refuting claims the Autonomy writedown was due to a “misunderstanding” of accounting rules, as “patently ridiculous”.

The HP/Autonomy deal directly or indirectly involved all of the Big Four, with KPMG brought in to conduct diligence on Autonomy after Deloitte signed off its audit of the UK company in 2010. Later PwC was brought in to carry out the report into the takeover, while Ernst & Young are the auditors of HP, and signed off the restated turnover.

HP is currently being sued by shareholders who claim the computer company knowingly made misleading statements over the contentious takeover. The lawsuit, filed in San Francisco, claims that this led to HP's stock price trading at artificially inflated prices before the company publicly accused Autonomy of cooking the books.

In addition, the deal and its parties are currently under investigation from a raft of regulators and watch dogs on both sides of the Atlantic, including the Serious Fraud Office and the Securities and Exchange Commission.

The takeover is also under investigation by the US Department of Justice and the UK's Financial Reporting Council.

Raymond Doherty


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Editors view: Autonomy, HP and the auditors