back to article In-depth: Deloitte and accounts expert both cleared what HPE described as 'contrived' Autonomy sales

Mike Lynch's expert accounting witness told the High Court that because Deloitte signed off Autonomy's accounts, everything must have been legal and above board. Summarising disputed transactions between former British software business Autonomy and various resellers and customers, Gervase MacGregor cited auditor Deloitte's …

  1. BebopWeBop

    I am prepared to bet the=at the US are hoping against hope that they can get an extradition deal finalised before the judges conclusions are finalised - they are probably also hoping that the UK's somewhat weak negotiating position vis a vi a trade deal will help, although the reported attempts by Johnson to tamper with the NI deal may well scupper that anyway.

    1. katrinab Silver badge

      The requirements for a trade deal with the US appear to be:

      1. There must be no hard border between Nothern Ireland and the Republic. This means no chlorinated chicken in NI

      2. There must be no hard border between NI and Scotland, England or Wales. This means no chlorinated chicken in any part of the UK.

      3. We must allow chlorinated chicken into the UK.

      1. NeilPost

        What about Acetic Acid washed chicken.???

        ... as the industry in NA seems to have largely moved to that as a newer technique. Noted I saw a report this was already in use in the UK beef industry.

        1. DontFeedTheTrolls

          The issue is not the content of the wash, it is that animals are treated poorly and are kept and processed in insanitary conditions because they are going to be cleaned with some kind of antibacterial just before release into the market.

          In the EU by not having the wash stage the treatment of animals and the sanitary conditions during processing are higher to start with. They're far from perfect, but better than the US.

        2. katrinab Silver badge

          The problem is not the particular chemical used to wash the chicken. The problem is the fact that they are relying on chemical washes to remove bacteria from the chicken rather than preventing them from being there in the first place, as chemical washes only remove bacteria on the outside of the chicken.

        3. xeroks

          it's the chicken

          The problem with chlorine washed chicken is not the chlorine, it's the chicken.

          The chlorine is there because the US has very low standards re. the rearing of poultry, so an attempt has to be made to sterilize the chicken before it hits the food chain. It doesn't always work, which is why the US has relatively high levels of food poisoning.

          The EU has much higher standards, so the chicken doesn't need to be sterilized during production.

          1. ToddRundgrensUtopia

            Re: it's the chicken

            Stop saying Chlorine, because it isn't Chlorine

            1. xeroks

              Re: it's the chicken

              fair cop guv, it's chlorine dioxide.

              The point still stands.

      2. Gordon 10

        Completely off topic but am I the only one who thinks it ironic that just as we leave the EU and if/when chlorinated chicken reaches these shores the feeling against it is so strong that our farmers will take a leaf out of the french book and burn it in the lorries?

        1. NeilPost

          Good luck burning a chicken, drumsticks, breast.

          Just dump it in the street and all manner of animals will come and swipe it.

          1. John Brown (no body) Silver badge

            "Just dump it in the street and all manner of animals will come and swipe it."

            That#sno way to talk about the local chavs and scallys!

  2. Alan Johnson

    Is this the best HP have?

    The whole point of the deal was to accelerate the income recognition. It was otherwise pointless and cost Autonomy money. However in the context of the case you have to say so what?

    An artificial deal to speed up recognition fo revenue from a specific deal by a few weeks but which otherwise had no effect is completely irrelevant in the context of what HP are alleging. How can this or any number of similar deals make a substantial difference to the value of the company? The big thing is that the underlying transaction was real and was properly accounted for and the fee paid added to the cost of sales and hence reduced margin.

    This deal clearly is saling close to the wind but by the same token it shows that they were taking care to have a basis in reality for what they did and to have the auditors check it.

    You also have to ask yet again where was the due diligence. If as part of due diligence you didn't sample and investigate in detail big deals to confirm there were no financial irregularities but also to understand the outlook for further sales then what was the point of it?

    1. Anonymous Coward
      Anonymous Coward

      Re: Is this the best HP have?

      I think the key point here is what was the agreement if Kraft didn't buy it? Was Autonomy going to continue counting it as a sale offset by "marketing expenses", and did they do exactly that on other transactions.

      Of course, HP haven't managed to get together any actual proof.

      1. Anonymous Coward
        Anonymous Coward

        Re: Is this the best HP have?

        Another point to consider is how big was this deal and how big are Capax?

        When smaller companies do business, you often do a Dunn & Bradstreet check which covers not only the solvency of the other party but also their financial size and strength i.e. are they going to be able to finance their side? The deal can't have been too big relative to Capax's size otherwise it would stand out like a sore thumb - one enormous deal among lots of much smaller ones. Given that HP don't seem to be questioning this aspect, and Deloitte were happy at the time, it can't have been that big.

        Which then begs the question: how many such deals do HP think Autonomy had on the go in order to inflate the P/E ratio to such an enormous extent that £8bn seemed a reasonable price to pay? Hundreds? If so, where are they? Why weren't they all paraded in Court?

      2. Aristotles slow and dimwitted horse

        Re: Is this the best HP have?

        But Kraft did buy it, thereby satisfactorily netting out the financial transactions as recorded in the audit outputs. Hypothesising about what would have happened if they hadn't is utterly pointless.

        In this specific case however, we need to accept that the HP expert witness didn't have access to all of the underlying Deloitte audit confetti, and therefore giving him a set of working assumptions would have been IMHO a base level courtesy.

        1. the spectacularly refined chap

          Re: Is this the best HP have?

          But Kraft did buy it, thereby satisfactorily netting out the financial transactions as recorded in the audit outputs. Hypothesising about what would have happened if they hadn't is utterly pointless.

          No, it's a key issue. If the risk of the deal falling through is transferred along with the licence then a real, substantive service is being provided. Essentially the risk is being insured against and the £400k is the premium for this service. From Autonomy's perspective the transaction is a done deal so it may be appropriate to book it as completed.

          On the other hand if no risk was transferred it is difficult to see what service of substance was provided. It is akin to paying an insurance premium but not getting any cover. The revenue isn't guaranteed at that point and it may be inappropriate to book it until it becomes so (subject to usual provisos about bad debt etc). It's then difficult to see what in substance occurs as a result of the sequence of transactions. Auditors are expected to be able to unravel that kind of pure paper shuffling and report on the actual underlying reality.

          1. xeroks

            Re: Is this the best HP have?


            To take a purely theoretical view:

            Imagine company A has a sale in the offing with company K, which has said "of course we want to buy your product, but I need to ask the boss next quarter. The boss will definitely, definitely approve it, which is why I need to wait and ask."

            However Company A wants to book that sale this quarter, for whatever reason.

            What would stop someone creating a brand new, burner Company C and using that as an intermediary? If Company K's boss agrees to the purchase, Company C gets a cut, if the boss disagrees, Company C goes to the wall, and Company A writes off the loss.

            1. katrinab Silver badge

              Re: Is this the best HP have?

              Short answer: you would have to declare it as a related party transaction

              Long answer: Ask the directors at Enron and the auditors at Arthur Andersen

          2. aks

            Re: Is this the best HP have?

            Does the fact that no "product" was delivered to the VAR during the short interval in question make the question of failure by Kraft to buy the product moot? Q4's figures would have taken a hit but that's all.

        2. Andronnicus Block

          Re: Is this the best HP have?

          Actually, I think that the HP expert witness would have access to the same material. I say this because I recall (but cannot find at the moment) something in the Post Office trial judgements where the judge was saying (paraphrasing) that both expert witnesses must have access to the same material (disclosure) and then apply their individual expertise to that common material.

          The HP expert was given clear guidance on how to conduct his review - from the preceding article footnote:

          * Peter Holgate was given several sets of specific assumptions - around a dozen each time - to follow when assessing various categories of Autonomy sales.

      3. I ain't Spartacus Gold badge

        Re: Is this the best HP have?

        Autonomy had the money in the bank, and there was apparently no written deal to say they had to take the software back. And a handshake deal isn't worth the paper it's written on.

        In the absence of any stated evidence to the contrary I suspected that Autonomy's US sales boss (Stouffer?) was using this deal to accelerate his revenues by one quarter in order to meet an internal sales target. Which presumably means his bonus?

        But that makes less sense now we know it was put to the auditors. Because that implies that other people have looked at this complex transaction and OK'ed it - which suggests possible other reasons to do it? After all a payment of $400k to the reseller for babysitting some licenses for a few months is quite large.

        So I'm still confused by this. But as that $400k was already in the final books for the year, as was the sale it relates to, I don't see how any of this is relevant to HPE's case.

        If sales people trying to get their sales to match their targets as exactly as possible, to maximise bonuses, was a reason to make multi-billion dollar write-downs - no large company would have any money at all...

        1. JimboSmith Silver badge

          Re: Is this the best HP have?

          I've worked somewhere that put part of a large order through on a Friday. The rest was put through on the following Monday. This meant targets were met in one month and there was a good start to the next. I've also seen orders placed without any payment for a few weeks. Again all done to make sure targets were hit and all signed off as okay. Never yet seen a warehoused deal where something was sold to a third party except in broadcasting etc. to get around ownership limits. However I would trust that the accountants checked everything thoroughly before giving the okay.

          1. Robert Grant

            Re: Is this the best HP have?

            This sort of nonsensical behaviour is why I hate fixed-period incentives.

            I have no alternatives. I have only the hate.

            1. Anonymous Coward
              Anonymous Coward

              Re: Is this the best HP have?

              I'm sorry - when I read your comment in my head I was thinking it said "laxatives" instead of "incentives".

              Made me laugh when I realised, even more so in the light of the amount of shite being peddled around this whole mess.

              So thanks, even if it was unintended and a product of my tired mind!

      4. katrinab Silver badge

        Re: Is this the best HP have?

        It is only a key point in an alternate universe where Kraft didn't buy it, or where at the time of preparing the year end accounts, Kraft had not yet bought it.

    2. oiseau

      Re: Is this the best HP have?

      You also have to ask yet again where was the due diligence.

      From what we have been reading, it appears that it was nowhere to be seen.

      After all that I've seen/read about this absolutely incredible US$8.1 billion blunder on behalf of HPE, it would seem that they neither knew or had a clue as to what due-diligence actually means/entails.

      But no, I've come to think that they did know but just did not give a monkey's toss.

      I'm absolutely sure there were reasons, albeit very cloudy/dubious or maybe even illegal.

      It would be a mistake to think those involved in this matter are utter morons for they are not and their main objective was (for whatever reason) to go ahead with the deal ASAP, no matter what.

      These things don't just happen ie: without any reason behind it.

      But I fear we'll never find out exactly why all this went down as it did.

      Nor will HPE's shareholders, obviously.


      1. I ain't Spartacus Gold badge

        Re: Is this the best HP have?


        I pretty much always believe in cock-up as an explanation for events ahead of conspiracy.

        In this case though HPE couldn't do the kind of due-dilligence that they (and many people on here) would have been expecting. It's commented on in their preliminary due dilligence report how little information Autonomy were giving them - which is in line with takeover practices in London that are different to those in the US. I believe in the US you get much more access to the takeover target's books - whereas over here there's less info given out.

        Obviously, if the target really wants to sell, they'll give you whatever access you insist on.

        1. oiseau

          Re: Is this the best HP have?

          @not Spartacus

          ... always believe in cock-up as an explanation ...

          Yes, I get your point.

          But I beg to differ: the people that get to sit on the board of a company such as HPE as CEO, CFO, etc. are not the sort of people who have been put there and are paid what they are paid to do it because they are prone to cock-up, actually quite the contrary.

          If in the course of the process of making an US$8.1 billion deal, Autonomy were playing the fool with respect to the information HPE required to be able to do it with the responsibility owed to its shareholders, then they should have not gone through with the deal until all the requested data was on the table and to their satisfaction.

          After all, it was US$8.1 billion ...

          But they pushed through with with the deal in spite of not having the information they requested.

          Smells fishy to me ...

          But then, I ain't Spartacus. ; ^ )



          1. Gordon 10

            Re: Is this the best HP have?

            Just because they are paid vast sums not to cock up doesn't mean they wont. Business history is littered with CEO's who made cock ups of the highest order through short sightedness, ignorance or sheer hubris. Cases in point. Gerald Ratner, Every HP CEO of the last 20 years, Nokia CEO, Blackberry CEO.

            In fact I would go as far as saying CEO cockups are the norm rather than the exception, if only because they are making so many high stakes decisions on a daily/weekly basis.

          2. I ain't Spartacus Gold badge

            Re: Is this the best HP have?


            They pushed through with the deal because they wanted the shiny really badly. And apparently because they believed that Oracle were moving in on Autonomy as well. Remember Autonomy were audited, so they had a decent assurance that the books reflected the actual value of the company. As this trial has pretty much proved, in that HPE are only suggesting a small number of transactions are dodgy after half a decade of them, the FBI and the Serious Fraud Office crawling over them.

            Which is a pretty good advert for auditing. People have the wrong idea, that audit checks for perfection - but that's not its role at all. It's designed to find big flaws by doing some quite detailed semi-random checks. While also checking the most important things, that the company has the cash on hand it says it has, by checking with the banks and some of the customers and suppliers.

            The UK takeover system is different to the US one for historical reasons, i.e. how the markets developed over time. And it would have taken a long time to persuade Autonomy to cough up extra data - not because they were playing silly buggers, but because they came from a different business culture.

            The thing that an auditor can't help with is the sales side of things. Did Autonomy have a good product, that was going to continue to sell in the long term. That's a business question, not an accounting one. As a rival in the same market, it was down to the HPE board to know that - and to have a plan to continue to grow Autonomy's sales. And that's what they failed at, either because they bought a product that had been "found out" by the market, or because they totally fucked up in trying to sell it.

            I assume cock-up over conspiracy because history and experience has taught me that this is what happens. In both politics and business, very bright people get paid the big bucks to try and control things. And they get some stuff right, but catastrophically fuck some things up on a totally regular basis. So to hint at some dark and sinister reasons for a conspiracy to deliberately lose $8 billion - without an even vague clue about why these people would do this, totally fails the credibility test. Whereas HPE's recent history is full of relative decline and their CEOs leaving under various clouds. Which suggests a dysfunctional board, making bad picks and failing to challenge those people when they do stupid things. Like buying Autonomy when that deal was opposed by their Chief Financial Officer - the very person they'd appointed to advise them on such issues.

            However her opposition was on grounds of it being too expensive and causing them to take on too much debt. And there doesn't appear to have been that much wrong with Autonomy's books, even if this trial finds against Lynch - because the books were a broadly accurate representation of the financial position of the company. The problem was a business problem, either because HPE managed them into the ground after the takeover, or because the product wasn't as good as the hype, or because the rivals improved quicker than Autonomy. Or a mixture of all three.

  3. Flak

    "what was the agreement if Kraft didn't buy it?" - but they did.

    What a waste of time an energy in this case - Kraft did buy it, Deloitte accepted the narrative at the time of the audit and those are the documented facts of the matter. Simple.

    Does a $5bn law suit hinge on hypotheses and alleged intent - or on what actually happened: HP was too keen to buy, was sloppy in its due diligence, overpaid and now has a huge case of buyer's remorse.

    I feel for the HP shareholders - they should be taking the HP team to task for what has been some spectacular value destruction!

    1. katrinab Silver badge

      Re: "what was the agreement if Kraft didn't buy it?" - but they did.

      Or the accounts are completely fraudulent because we think that in the hypothetical event that a sale which did go through hadn't gone through, they might have reported it as going through anyway.

      1. Gordon 10

        Re: "what was the agreement if Kraft didn't buy it?" - but they did.

        One deal that doesn't appear to be dodgy even if you squint through HP rose tinted specs does not make the accounts completely fraudulent and even if *every* deal HPE has flagged was fraudulent it still doesn't explain the stupidly huge price they *chose* to pay for Autonomy.

        AFAIK those deals were a fraction of Autonomy's revenues and *even if fraudulent* should not have been material to HP's valuation.

        HP's whole argument seems to be based on suggesting a tiny whiff of smoke means the whole building was on fire, when in reality it appears they cant even prove that it was just the teaboy burning some toast.

        I can guarantee you in every big company there is gonna be a close to the line deal or 2 - its simply human nature - sales droids are gonna sales droid.

  4. A Non e-mouse Silver badge

    Small Fry

    The size of this deal (and the others alleged to be dodgy) are tiny with the size of the write-down HPE made on the Autonomy purchase.

  5. Doctor Syntax Silver badge

    "seasoned legal minds"

    Do you have to take their opinions with a pinch of salt?

    Thanks, Gareth. The more I read the dodgier HPE's case looks.

  6. TeeCee Gold badge
    Black Helicopters

    How much did the auditors know?

    I remember a colleague collapsing in fits of laughter. He'd been writing a new posting system for the General Ledger and couldn't for the life of him get it to work reliably with the live data sets. To see what was up, he'd pulled the iffy source for the old version, hence the laughter.

    It didn't bother posting the (allegedly matching) debits and credits. It posted the debits, reversed them, posted the results as credits and threw the credits away.

    Full audit every year there was too.

    As a result, I am firmly of the opinion that if you were perpetrating a massive fraud and hung a neon sign on it saying; "I am a massive fraud", the auditors would still miss it.

    1. Anonymous Coward
      Anonymous Coward

      Re: How much did the auditors know?

      Given that our accounts were signed off for years with a similar cockups, i'd be inclined to agree.

    2. Anonymous Coward
      Anonymous Coward

      Re: How much did the auditors know?

      Some auditors ask the right questions. Few do as it's too much work (and they probably don't understand the question or answer)

      Auditing as a profession is ripe for massive upheaval.

  7. macjules

    ... reached an out-of-court settlement with HPE prior to the start of the Autonomy trial.

    I wasn't aware of that. So they could say whatever they wanted on the basis that "Psst, we already have our Get Out Of Jail Free card signed by HPE"?

  8. a_yank_lurker

    Bean Counting

    The proper bean counting for a complex deal is likely to have parts that are murky at best; honest people can come to very different conclusions on how to count the beans. The real question I have is not that some of the bean counting is a mess but whether there was any real attempt to misstate Autonomy's overall financial position. From what I can understand there was no attempt to misstate. So now we are to do arguing about interpretations of accounting rules on some murky parts of various deals. Did HP overpay for Autonomy and not do proper due diligence, the answer to both is yes. But that is not the fault of Autonomy but HP under Leo the Galactic Idiot.

    1. ToddRundgrensUtopia

      Re: Bean Counting

      Don't forget country music luvvin Meg

    2. John Brown (no body) Silver badge

      Re: Bean Counting

      "honest people can come to very different conclusions on how to count the beans."

      It's a bit like the old guess how many beans are in the glass jar wheeze. You can't know if they put an inflated balloon inside, even of you do have an accurate measurement of the jar and the beans.

  9. Anonymous Coward

    Notes from an actual auditor

    Before I got into IT, I got an accounting degree and worked as an auditor for KPMG (back then, Peat Marwick).

    The key to this argument is whether the license actually transferred. If ABC, Inc sells a ton of widgets XYZ, LLC for $1m the audit will look for invoices, delivery, acceptance, and payment. If the paperwork supports this (as it appeared to in this case) then it's a sale and the audit will certify this.

    BUT, if ABC calls up XYZ and says they want XYZ to store the widgets until the next quarter and then ABC will pick them up and give XYZ back the original amount plus 10% for their trouble, then it's not a sale. The auditor will not know about it and it won't affect their opinion (which it definitely would if they did know about it).

    A clean audit opinion doesn't prove their wasn't fraud, just that the company wasn't stupid enough to put it in writing.

    That all (boringly) said, the amount of this fraud seems small compared to the overall deal.

  10. John Smith 19 Gold badge

    "reached an out-of-court settlement with HPE prior to the start of the Autonomy trial."


    So that's why they're not going after the auditors.

    They've already paid up.

    As others have noted it's about the level of risk of this transaction not going though.

    If it had been "We phoned up Kraft. They said they might be interested. Hold this license so we can book the revenue would you" Total scam.

    OTOH. "Kraft have already rolled out half our system. It makes no sense without these (licensed) features so they will buy, it's a case of when.Hold the license and we can book the revenue. That looks quite reasonable.

  11. Anonymous Coward
    Anonymous Coward

    Leo was going through with this deal come what may

    I was an HP staffer at the time this deal went through (although very much on the sidelines) however along with the ill fated HP phone, HP Touchpad and webOS Autonomy was torched at the altar of Leo's vanity in trying to morph an ailing hardware vendor into a software one...This deal was going through NO MATTER WHAT! When your CFO says its a bad deal you take notice and back out or sack her...neither of these things happened.

    The auditor was paid by HP to do a job and must have been under at least implied pressure to finish quickly and in favour of the decision that had already been made, so HP vastly overpaid for a company and then as always made a Jeremy Hunt of the integration.

    Mike Lynch is guilty of what any business person would do in his shoes...stick lipstick on the pig and hope someone buys it. Is that dishonest..maybe a bit but far from criminal....

    1. Anonymous Coward
      Anonymous Coward

      Re: Leo was going through with this deal come what may

      Well said. HP's board - including Megaphone Meg and Ray No-life-between-his-ears-Lane - needs to take some responsibility as well. Slaps his forehead and falls over backwards at his own delusional thinking .....

  12. MichaelValidationPleaseStop

    Is this like an accounting rom-com fan-fiction site? If so, get to the hanky panky! It's been yeeeeaaaarrrrsssss already.

    1. John Brown (no body) Silver badge

      The secret to these sorts of shows is the "will they/won't they" hook to keep the audience interested. They never actually get together, the show just fades out and gets cancelled leaving the audience unfulfilled.

  13. DontFeedTheTrolls

    "The auditor – one of the "Big Four" – reached an out-of-court settlement with HPE prior to the start of the Autonomy trial."

    Ding, ding, ding, we have a winner. I can't say Autonomy and its people are entirely innocent, however the Auditor signed off the deal so it cannot have been that far from the norm.

  14. knarf

    Side deals and VARs

    VARs are used by HP, Oracle, IBM and loads of others so any VAR deal is a side deal.

    You also can't sell into Middle East without a local bri.... VAR merchant and loads of other places make it really hard if you don't have a local agent (bribe agent).

    Looking at his particular deal, it looks like the customer wanted it in before they could get the money signed off (via board meeting) so VAR stepped in to take the risk and maybe make sales look at little nice; this is more likely to be hitting bonus targets than actually pumping up the value of the company.

  15. EnviableOne

    Sour Grapes

    Ok so Automomy's business practices were close to the line, their auditors signed off on them, and although they complied with the letter of the law, as far as Delloite could tell.

    The speed at Which HP (at the time) completed the deal, and papers that came out in the previous US trials, show they didn't do more than cursory due dillegence before the deal. Anyone with half a mind to look, could see that Autonomy wasnt worth that much, HP's board is at fault here, but they are trying to blame everyone else, so they can justify it to the markets/shareholders.

    I don't think any of us in Mike Lynches position would not have taken that offer when HP made it.

    1. Michael Wojcik Silver badge

      Re: Sour Grapes

      I think it's pretty clear that HP screwed this one up, thanks mostly to Leo's foolhardiness and unwillingness to listen to reason, and the board utterly failed to do its job and rein him in.

      However, I don't think that helps Lynch's case much. Despite the fact that I'm not convinced Lynch did anything wrong, I don't think it's particularly productive to go after him if he did, and I don't think any great injustice would be remedied if he were to lose the civil or criminal case, I don't believe (IANAL) that "they should have been more careful" constitutes a defense in a criminal case in the US, and probably not in a civil one, either. If someone commits fraud, it doesn't matter if their victims should have been more careful; if it did, Bernie Madoff would be a free man.

      The US legal system (and I believe that of the UK) recognizes the principle "knew or should have known" as a justification for assigning liability, but in all the cases where I've seen it employed, it refers to a duty of the defendant, not the plaintiff or state. That is, you can find against a defendant on the grounds he/she/they "knew or should have known" something, but you can't find for the defense on the grounds that the victim "should have known" something wasn't right.

  16. John Smith 19 Gold badge

    Consider if you will

    HP (on hands free) We want to buy you for $11Bn

    Autonomy CFO (after phone is muted) No way are we worth that kind of money. They're morons.

    Autonomy CEO I'm not saying they are and I'm not saying they aren't. But they got the money and they think we are worth it. So work out how we're going to get that money in. (phone off mute). OK, well I think we can accept that price.

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