back to article HP lifts lid on Autonomy lawsuit claims, but Lynch cries BOLLOCKS

On Tuesday, HP made public the details of the lawsuit it has filed against former Autonomy executives Mike Lynch and Sushovan Hussain in the UK, in what is just the latest round in litigation that is only likely to get uglier as the suit progresses. "HP confirmed today that Particulars of Claim against Lynch and Hussain were …

  1. Anonymous Coward
    Anonymous Coward

    The Enron Defence

    Wasn't it Enron who claimed all their BS financial fraud moves were just peachy because their auditors OK'd them?

    Seriously, taking an Autonomy order for X quid right before the end of the quarter from a customer, then spending the same X quid with the customer (not a mistake: Autonomy was paying its customers) in the following quarter? Oh, I see, it's a marketing expense for products and/or services from the customer... that just happens to be the exact same amount as the order last quarter? Well, that doesn't look suspicious at all! Customer says "Yep, that was the deal -- we bought their stuff and they bought ours". Cue auditors sticking their fingers in their ears and going "la la la la la... nothing to see here... same time next quarter... send us the check to the usual address"

    1. Anonymous Coward
      Anonymous Coward

      Re: The Enron Defence

      Wasn't it Enron who claimed all their BS financial fraud moves were just peachy because their auditors OK'd them?

      Regardless of the claims re. Autonomy itself, I am hoping someone can explain to me why the auditors are not on the hook for this one as well. Surely, if the fraud was that massive and pervasive it should have come out through the audit? Otherwise, what is the point of an audit in the first place?

      1. Steve K Silver badge

        Re: The Enron Defence

        Because an audit is not about detecting fraud....

        An audit is about giving a "true and fair view" of the financial statements in question to the company/organisation's (generally external) stakeholders - for example shareholders.

        If a fraud is perpetrated by staff and/or company officers, this MAY be detected by the auditors as part of this work, but if the auditors are supplied with false information by relevant staff or company officers then there is not much they can do.

        If there is insufficient information then they may well qualify their opinion on the accounts or indeed not sign them off at all.

        Negligence is a different matter, but that's why there will be a record kept of how the opinion was reached - particularly on contentious matters - by the Partner signing off the accounts.

        (In a former life I was a Chartered Accountant.....)

        Steve

        1. nijam Silver badge

          Re: The Enron Defence

          > An audit is about giving a "true and fair view" of the financial statements ...

          Not strictly correct, it's about *confirming* that the accounts (which may be produced by the company itself or by external accountants, who in turn may be the same accountants that do the audit) give that "true and fair view".

          A significant part of that confirmation lies in checking (at least some of) the information provided by thoise being audited.

          > (In a former life I was a Chartered Accountant.....)

          Me too.

      2. MK11

        Re: The Enron Defence

        Rather than Autonomy's auditors, surely it is the firm doing the due dilligence for HP that needs a kicking?

        If the bulk of the $100m's differences relate to the UK to US GAAP differences then this ought to have been picked up by due dilligence.

        But that still doesn't explain how $100m's of timing differences on revenue recognition then get converted to multi billion dollar valuation differences though.

    2. Gordon 10 Silver badge

      Re: The Enron Defence

      Missing the point slightly, whether or not that was going on and all HP has been able to find is a couple of examples in the 100m range, the SFO also gave up - so it doesn't explain

      a) why HP didn't do proper due diligence.

      b) how it equates it a multi billion write off.

      If autonomy is a little whiffy HP stinks to high heaven.

      1. Anonymous Coward
        Anonymous Coward

        Re: "the SFO gave up"

        Careful.

        1) The SFO have a history of giving up (or even being told to give up).

        2) SFO were an Autonomy user; what was their relationship with Autonomy? Obviously the SFO would say all is above board. What would an outsider with the full picture say?

        3) SFO, in closing their enquiries, didn't say Autonomy were in the clear. They said they had insufficient evidence for some of the allegations and that for the others the right place for further enquiries was in the US. Not the same as "in the clear".

        https://www.accountancylive.com/sfo-drops-autonomy-investigation

        1. streaky

          Re: "the SFO gave up"

          SFO were an Autonomy user; what was their relationship with Autonomy?

          They use Autonomy so aren't in a position to investigate former autonomy management because why, HP will change their licensing terms? You srs?

          They said they had insufficient evidence for some of the allegations

          Operation lets try to disprove a negative. God exists and you can't prove he doesn't, so therefore you're wrong. Lalalalala I'm not listening.

          A lot of AC's mouthing off about things they clearly don't understand. Also for the record: Enron is precisely why accounting rules are tougher these days: and in fact the problem with Enron's accounts was simply this - their accountants were heavily invested in the business, and none of the relevant regulators (or indeed Enron's other investors) (apparently) picked this up until after the fact.

          1. Anonymous Coward
            Anonymous Coward

            Re: "the SFO gave up"

            "They use Autonomy so aren't in a position to investigate former autonomy management because why, HP will change their licensing terms? You srs?"

            Are YOU serious?

            To once again quote Mr Worstal, where there's Autonomy, there's a whiff. Nothing solid (yet), but having SFO staff investigate Autonomy business practices is a bit like having ex-policemen investigate complaints against the police. IE overall it's unlikely to be convincing, even if they come up with the right answer. Justice has to be *seen* to be done.

            NB I have no intention of defending HP (and their advisers) here.

            1. streaky

              Re: "the SFO gave up"

              Are YOU serious?

              To once again quote Mr Worstal, where there's Autonomy, there's a whiff. Nothing solid (yet), but having SFO staff investigate Autonomy business practices is a bit like having ex-policemen investigate complaints against the police. IE overall it's unlikely to be convincing, even if they come up with the right answer. Justice has to be *seen* to be done.

              You still haven't explained where the conflict of interest is here. If the SFO is going to lean either way it's going to be towards HP's views given who is in control of the software in question.

              It's easy to heckle and lob abuse from the AC cheap seats, you're just doing exactly what HP is doing, making accusations with nothing backing them up.

              Also by the way - justice being seen to be done, are you seriously suggesting that Autonomy's former management should be prosecuted just because they're people in a position of profile and it'll make you feel better despite, ostensibly, doing nothing wrong?

              Per the SFO, and I see zero issue with what they say:

              The SFO uses an HP Autonomy product. Throughout the investigation we have kept the potential for conflict of interest under review. Such a conflict of interest does not exist, nor has it ever existed, and the matter played no part in any decision concerning this investigation.

              It is, in fact, a HUGE leap to say the SFO will lean towards the people who are no longer involved with the business. It's just absurd - and even if it wasn't they're not the only people looking into the case regardless.

      2. Anonymous Coward
        Anonymous Coward

        Re: The Enron Defence@ Gordon 10

        "so it doesn't explain...how it equates it a multi billion write off."

        Meg Whitman did the same with EDS where her predecessor Mark Hurd had bought that company, and shortly afterwards it turns out that HP needed to write off $8bn. So buying Autonomy and writing off $8.8bn is simply Groundhog Day over at HP's offices. They've found big writedowns a vital tool in their otherwise empty management toolbox.

        Rather than how, I think a more interesting question is why. Whilst there's a lot of pain for shareholders in an asset write down, certain performance ratios like return on capital are flattered. If you write the asset down to next to nothing, then a valuation a couple of years later will add big bucks to the balance sheet assets, which you can then claim to be down to managerial skill and business growth. Moreover, in a big number like $8-9bn there's plenty of opportunity to wrap up vast sums to cover many other mistakes.

        Interestingly, HP are trying to sue the Autonomy bods, but if the company was such a bad buy, then I'm surprised they don't use the US Racketeering Influenced and Corrupt Organizations Act against them and all parties to the deal. Winning on that would enable them to fully unwind the transaction. But that would mean that Autonomy were either back in business on their own, or sold to a competitor. Funny that they don't want to do that, isn't it?

    3. anothercynic Silver badge

      Re: The Enron Defence

      No. Enron was completely different. Enron used special vehicles (in the financial sense) to 'hide' debts and make themselves look spiffy while it was all rotten to the core.

      There is nothing financially improper to book one transaction as profit in one quarter and then book another, identical, transaction as expense the next, provided it adheres to accounting rules :-)

      Entertainment/media giant ClearChannel used to do the same thing between their divisions (before they were 'unbundled to maximise shareholder value')... What the ClearChannel Outdoor division billed as revenue was something the ClearChannel Entertainment division had to put down as an expense (i.e. paying CCO for billboard ad space), despite both being part of the same conglomerate. CCE's revenue used to be enormous, their profit would be razor thin (relatively speaking), while CCO had much fatter margins. And CC as a whole got to add all the sums up and say that their revenue was X even though a lot of said revenue was cross-divisional revenue that cancelled itself out. If all that cross-divisional crap had been taken out, the revenue would've been much lower but that doesn't look sexy to the stock brokers :-)

      1. Steve K Silver badge

        Re: The Enron Defence

        Me again....

        The accountants have that one covered too.

        That's why in Consolidated Accounts you will eliminate at a Group level any Inter-company transactions and investments so that only externally-generated items are shown.

        Obviously if you fudge this then the external figures will be wrong, but it is something that is looked at closely both in audits, and also in the implementation of Financial Consolidation systems (e.g Oracle HFM).

        Intentionally fraudulent misclassification will also be hard to spot here, but short of replaying the whole year, the auditors of such organisation have to design their tests and reliance on Management-instituted controls and systems to reach their opinion.

        (I worked on the Mirror Group audit in 1991 as an audit junior - whilst I was as not involved in the messy bits, it was an interesting time...)

        Steve

    4. Dabooka Silver badge
      Headmaster

      Re: The Enron Defence

      *cheque

      1. Dabooka Silver badge

        Re: The Enron Defence

        Ah, I see my own personal A/C is still on a downvote rampage. He / she went back through all my posts downvoting them last week, must have taken quite some time that.... /tragic

    5. Anonymous Coward
      Anonymous Coward

      Re: The Enron Defence

      I thought Autonomy was booking large deals that included an element of their software license plus a large chunk of hardware sales, then taking a charge against their marketing budget for the cost of the hardware. So sales looked good and on the up, but in fact the software license element of those sales was much smaller than you might expect from what was after all a software company.

  2. Anonymous Coward
    Facepalm

    What hasn't HP bungled in the last 15 years? The plucky British lad get the benefit of doubt IMHO

  3. TonyJ

    Due diligence, anyone?

    Surely if the alleged fraud was so prevalent and so easily spotted in hindsight, a certain level of due diligence would have thrown this up early into the process?

    Caveat emptor, surely?

  4. John Smith 19 Gold badge
    Unhappy

    Correct me if I'm wrong but when you *buy* a company

    You get to dig deep into the other firms accounts.

    And I find it very hard to believe HP's didn't find any of this.

    I smell the fatal attraction of two CEO's, both with enormous egos IN some ways they are always the easiest to fool.

    It's the HP stockholders I actually feel (slightly) sorry for. $11Bn wiped off their share price.

    1. Fatman

      Re: Correct me if I'm wrong but when you *buy* a company

      You get to dig deep into the other firms accounts.

      Most certainly someone does, whether it is the acquirer directly, or an accounting firm hired to perform the diligence, you do get to dive deep into the books. A truly competent purchaser wants to know exactly WHAT they are buying.

      My employer bought up a family owned company a few years ago, and since the children of the owners had authority to act on behalf of the underlying corporation; we looked hard at any and all contracts that they may have signed.

      Once we had an understanding on a purchase, we required, as a matter of the purchase, to have ALL EMPLOYEES disclose any and all employment contracts that they had with the company. This included the children of the owners. Since they were not aware of the pending sale, they indicated in their disclosures that no such contracts existed. The other aspect of the understanding was that the sellers were to revoke the authority of the children to sign any employment related contracts during the diligence period. They were not told why.

      Sale closes, and we decide that it would be a Good Thing(tm) to put into place our own management, so we dismissed them. Cue the lawsuits for "contractually agreed upon severance benefits" when they pulled these 'severance agreements' out of their asses. "See you in court." was our reply.

      First one of the kiddies on the stand, made an attempt to persuade the judge that he should get severance benefits; was completely blown out of the water when the disclosure document was put in front of him (apparently he forgot about it). His lawyer tried to get the judge to rule that he had the authority to sign such a contract, but that was also blown out of the water when the stockholder resolution revoking the authority was introduced as evidence. Wisely, the children dropped all efforts to recover their 'severance pay'.

      Meanwhile, our auditors were reviewing all expenses of the company to determine if any company funds were not misused, and one could make the case that payment of household utility bills out of company funds (and booking them as usual and customary business expenses) was misuse. After re-filing the tax returns showing all of those funds as 'executive benefits' (subject tp being reported on a 1099 form) instead occupancy expenses; they became serial tax evaders. Cue the letters from the IRS.

      Payback is a bitch, isn't it?

  5. Tim Worstal

    There's no one at all in The City who ever really believed Autonomy's accounts. Nothing specific, just a whiff to them.

    And HP's bankers would have known this.

    1. John Smith 19 Gold badge

      @Tim Worstall

      "There's no one at all in The City who ever really believed Autonomy's accounts. Nothing specific, just a whiff to them."

      That certainly sounds like a warning bell to be weary of them but of course that's still the outside view.

      As HP was buying the company their auditors should have much better access to the companies finances and operations.

      My only awareness of this was when a US company sent 3 auditors into a UK company (single site) with essentially "Access all areas" authority. they went deep

      The only issue identified was the large number of unlicensed games running on 3 machines on the network.

      The machines the auditors had brought with them. |:-)

    2. Anonymous Coward
      Anonymous Coward

      "no one ... really believed Autonomy's accounts"

      "There's no one at all in The City who ever really believed Autonomy's accounts."

      Well, apart from their auditors, presumably, who signed off the accounts year after year. Same auditor every year, makes life so much simpler.

      Auditors can usually be relied upon to do what they're paid for. Like a financial-sector equivalent of Douglas Adams' Electric Monk, except much more expensive.

      Deloittes were Autonomy's auditors, and also provide "non-audit services" to Autonomy, including advising Autonomy on executive pay. Hmmm. In the US, Sarbanes-Oxley would in theory prohibit that, and US accounting practices would have made Autonomy's books look rather different. Allegedly.

      Where's the story about what the techies and other employees knew at Autonomy? I've seen a handful of writeups that say anyone with the full picture would be a little concerned.

      Still doesn't excuse HP's idiocy though.

      http://www.economist.com/news/finance-and-economics/21567953-two-controversies-ensnare-big-four-accountable

      http://www.goodreads.com/quotes/150267-the-electric-monk-was-a-labour-saving-device-like-a-dishwasher

      1. anothercynic Silver badge

        Re: "no one ... really believed Autonomy's accounts"

        [quote]In the US, Sarbanes-Oxley would in theory prohibit that, and US accounting practices would have made Autonomy's books look rather different. Allegedly.[unquote]

        Precisely what Mr Lynch keeps saying... "You can't apply your US accounting standards to the Autonomy books since we're using different accounting rules over here. We did nothing wrong."

        Not that I'm excusing or blaming either party, you understand. :-)

        1. Anonymous Coward
          Anonymous Coward

          Re: "we're using different accounting rules"

          "we're using different accounting rules over here. We did nothing wrong."

          He would say that wouldn't he.

          Have a read of the following two examples taken from the extensive coverage of this week's HP press release (and Lynch's response) in the UK's non-IT press.

          I assume it is accepted that Autonomy were doing these things, all that is seemingly at stake according to Lynch is whether it's legal (he says it is) or not.

          Verbatim extracts below, please read full articles for more context:

          E.g. 1:

          [Autonomy US's CFO, later sacked by Lynch,] queried reciprocal transactions, which HP now alleges Dr Lynch and Mr Hussain used to falsely inflate sales. According to the court filing, a reseller would buy software without having a customer to sell it on to, allowing Autonomy to book the sale, and at a later date buy something without real value from the reseller to compensate.

          For instance, HP alleges that in late 2010 Autonomy paid one reseller, MicroTech, $9.6m for what amounted to little more than a van.

          Dr Lynch’s lawyers said the vehicle was part of a strategy to sell more software to sensitive US Government clients and the value of the licence it bought to use it was checked for fair value by Deloitte.

          http://www.telegraph.co.uk/finance/financial-crime/11583498/HP-claims-Mike-Lynch-sacked-Autonomy-finance-boss-to-silence-concern-over-sales.html

          E.g. 2

          Riding high in the FTSE 100, in 2010 Autonomy founder and chief executive Mike Lynch decided to signal its status as part of Britain’s corporate elite by sponsoring a Premier League football team.

          Autonomy’s deal with Tottenham Hotspur came with strings attached, according to Hewlett-Packard, which a year later would buy the company for $11.1bn. Autonomy would pay £9m to put its logo on players’ chests, and millions more in the second season, but the club would buy £4m of software and services in return, according to court documents.

          The following year Spurs agreed to spend another £4m with Autonomy.

          http://www.telegraph.co.uk/finance/financial-crime/11584518/HP-Autonomy-Mike-Lynch-Tottenham-Hotspur-and-the-worlds-most-expensive-van.html

          1. Gordon 10 Silver badge

            Re: "we're using different accounting rules"

            @AC eg 1 and eg2.

            And those are the 2 examples everyone bandies about, and they are peanuts how do you get from them to billions?. Don't you think that if there was actually anything material HP would be crowing about it and the SFO would be prosecuting.

            The sponsorship deal doesn't even sound particularly unusual in the world of football tbh. Sounds like Spurs had a net benefit. Football funding is a whole different house of cards anyway.

            1. Anonymous Coward
              Anonymous Coward

              Re: "we're using different accounting rules"

              "Don't you think that if there was actually anything material HP would be crowing about it and the SFO would be prosecuting."

              I wish. But that's not why we have the SFO (in fact I'm not sure why we do have the SFO).

              There's so much damage limitation going on in so many places here, stuff that would likely come out if the case came to court (in the same way that stuff eventually came out at Oracle vs HP, but mostly folk had lost interest by the time it came out), that the SFO probably just did what they thought was expected of them by their mates in the Big Four (who don't come out of this at all well either way): "Nothing to see here, move along now please."

              "The sponsorship deal doesn't even sound particularly unusual in the world of football tbh."

              Course it doesn't, it's just what you'd expect from JD Sports or whoever. And obviously Spurs need a multimillion pound intelligent text search engine and matching amounts of services. Every football club should have one.

              This one could run and run, even better than Oracle vs HP. Maybe.

              1. Anonymous Coward
                Anonymous Coward

                Re: "we're using different accounting rules"

                Why they would need it is immaterial, as long as there was a legitimate transaction.

                1. Anonymous Coward
                  Anonymous Coward

                  Re: "we're using different accounting rules"

                  "Why they would need [several milion pounds worth of Autonomy products and services] is immaterial, as long as there was a legitimate transaction."

                  Correct.

                  On the other hand, as Mr Worstal said earlier re City feeling re the general state of the Autonomy accounts:

                  "Nothing specific, just a whiff to them"

                  Selling expensive stuff to people who have no obvious need for it, with a value that closely matches a multi-million pound order they've just paid you for, isn't illegal. But maybe it whiffs a bit.

                  Lots of people round here will have heard of channel-stuffing and similar practices in the manufacturer->reseller sector. Hopefully it's not as prevalent as it used to be (given that the SEC and folks did get upset at one point), but even in its glory days, I'm not sure it went as far as Autonomy appear to have gone.

    3. theblackhand

      RE:Autonomy and the City

      The Autonomy management team, bankers, accountants, auditors are all likely to have contributed to the original value of around US$5.7 billion (which was over valued based on HP's write down to around $3.3 billion) - but HP and their advisor's seem to be the ones that bumped that figure up to US$11 billion.

      To pay double the market rate suggests HP had a plan so cunning they could pin a tail on it and call it a weasel. Or that HP's board were thick as two short planks. Possibly both....

    4. ToddR

      So you know ALL in the city? Silly statement

  6. Anonymous Coward
    Anonymous Coward

    My uninformed guess is that HP got a lot of good advice at the time that Autonomy wasn't a good fit (for all sorts of reasons) but that someone with an ego rather bigger than their talent or common sense wouldn't listen.

  7. Aristotles slow and dimwitted horse Silver badge
    FAIL

    Mike Lynch is quite correct when he refers to HP management as "inept".

    Just my $0.02 - I have been in IT management now for the best part of around 25 years in various forms. In that time I have had the misfortune of having worked on multiple engagements where HP have been either a delivery partner, SI or "consultancy" in some area or another.

    In each of these engagements, the HP management and quality of those personnel, the managers themselves, and/or the quality of the usual litany of subcontracted offshore 3rd parties (mostly often also owned by HP BTW) can only be described as inept. "Totally shit" would be a more flattering description if you were wondering about the hierarchy.

    I have no doubt that HP have some good people (somewhere) but they certainly aren't in professional services management as far as I can tell, or in the "provision of good value for money" department.

  8. Yugguy

    Bollocks would he have said "bollocks"

    He's from Essex.

    He'd have said "FAAAACKIN CAAAAAAAAAAAAAAAAAAAHNT"

  9. Anonymous Coward
    Anonymous Coward

    Let's not forget how much HP overpaid...

    Every time this story resurfaces, we should remind ourselves that even if Autonomy's books turn out to smell like roses, HP *still* paid billions of dollars more than anybody else thought the company was worth.

    1. Anonymous Coward
      Anonymous Coward

      Re: Let's not forget how much HP overpaid...

      Didn't they get shopped to Oracle who laughed at the valuation?

      My direct experience of Autonomy was:

      1. Being invited to lunch at Per Se in NYC along with ~100 other people. Lunch at Per Se is $400+ per person. Most of the other people were Fin Serv types, none of us had any intentions of buying anything from them.

      2. Being scheduled for an interview with them and the internal recruiters who set that up being unaware that they had moved their NY office location almost a year before. I took that as a sign of internal incompetence and walked away from the process. I'm very glad I did

  10. Anonymous Coward
    Anonymous Coward

    but what i really want to know is

    does he still have the mini steam railway and the shaggy dog?

  11. NotoriousREV

    Was there anyone connected to the IT industry that didn't go "Huh, what?!" when HP announced they were buying Autonomy for $11Bn? Even my cat knew that they were overpaying and she didn't have the benefit of looking at the (allegedly cooked) books.

  12. BongoJoe
    Megaphone

    New Picture Requred

    You need a new picture for HP. One with their snazzy green coffin.

  13. Anonymous Coward
    Anonymous Coward

    Autonomy - purveyors of hot air

    Seriously, why anyone would have bought that buzzword-laden nonsense company is beyond me. HP got what they paid for - just at a higher price than sane people would pay for it.

    Maybe they thought it'd grow into a beanstalk or something.

  14. Anonymous Coward
    Anonymous Coward

    Revenue recognition

    Having done this in a previous life for US listed company based in the UK sob having to use US GAAP I would side with autonomy. The U.S. Rules, a fun read for insomniacs, on revenue from long term contracts and services including software were highly prescriptive and based on previous issues found, once bitten twice shy etc.

    As a former accountant I'm surprised that the due diligence did not take into account some level of restatement for different accountImg rules, after all once it goes through you are going to be adding their results to yours and will have to provide prior period comparatives so you want to understand this.

    Let's assume that there was no audit fraud, after all the SFO would have been very interested in that, then the failure is due diligence and caveat emptor kicks in.

  15. All names Taken
    Paris Hilton

    Brit disease?

    It reads like a typical case of the Brit disease (talk hi, deliver lo, line pockets as swiftly as possible)?

    A claim for billions against a claim for millions and like, yeh, who is going to say 'I admit'?

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