Reply to post: Re: report demolishes Lynch's defence ... not sure.

Re: report demolishes Lynch's defence ... not sure.

I have read the report of the Disciplinary Tribunal. It took me several hours, but to be fair the oral evidence alone occupied approximately 20 days with oral opening and closing submissions from counsel over several days and voluminous written evidence.

This report is a cracking read, especially if you sit on an Audit Committee (full disclosure I do) or if you have been involved in selling software (even fuller disclosure I have in the past). Or maybe you have heard rumours of just how many deals get stuck right at the end of financial quarters, as if those pesky customers know about the supplier financial reporting periods (wait a second I've just realised...)

I think anyone who does read this report - and please do read it, even if only to admire the beautiful writing - will find it is both thorough, and somewhat sad, like watching a very slow car crash play out. The auditors were found to be culpable of misconduct in relation to (i) the allocation of hardware costs in Q3 09 and Q4 09/FY 09; (ii) the non-disclosure of the hardware sales in FY 09; (iii) the recognition of revenue from sales to VARs in Q4 09/FY 09, Q1 10 and Q2 10 and and Q3 10. They also failed to correct Autonomy’s letter dated 3 March 2011 to the FRRP. By the time you read these conclusions you will have long since realised where this was going to end.

It is an educational report because it paints such a vivid picture of the market scrutiny and the constant background pressure on the Autonomy Managers, and subsequently the pressure on the auditors:

"The pressure on Autonomy to meet market expectations gave rise to a risk of misstatement through manipulation of the financial results to achieve a desired position. Deloitte, Mr Knights and Mr Mercer were well aware of the pressure and the risk. They were under pressure from Autonomy to accept its treatment of the hardware costs and the revenue from VAR transactions, rather than upset their client by challenging it."

The Tribunal considered why that mattered. Why the pressure from market scrutiny? Para 291 and 292 sets out the impact. Evidence from one analyst was:

"if the market had known of the 2009 hardware sales, the impact on Autonomy’s stock in 2010 and early 2011 would have been “significantly negative”.

A second thought that: "a negative reaction to the share price of at least 30%".

And a third - a former Head of Investor Relations for Autonomy - said he:

"...was unaware of the hardware sales in Q2, Q3 and Q4 10. If he had been aware of them, they would have indicated that Autonomy was:

“a totally different type of business and a totally different business model, which would have had a very different valuation ... it would have indicated that this wasn’t a pure software business, and that there was much lower margin revenue stream included in its – in its P&L, and it would have had a correspondingly low evaluation [sic]”

So really bad and really clear. But the remit of the Tribunal - as the report says - was only the Auditors. The introduction makes it very clear that:

"No individual director, member of management or employee at Autonomy was a party to the Tribunal hearing. The Tribunal did not invite, receive or consider any witness evidence from any director, member of management at, or employee of Autonomy, and no such individual was represented at the Tribunal’s hearings. Further, the Tribunal did not invite or receive comments or representations on the terms of the Tribunal Report from any such individuals prior to the Tribunal Report being finalised."

Just in case anyone missed the significance of that, the introduction then states:

"The Tribunal has not made, and should not be taken to have made, any finding against any individual or entity other than Deloitte, Mr Knights and Mr Mercer (including Autonomy, or any individual who was a director, member of management or employee at Autonomy)." It even anonymises several third parties, who are instead identified by ciphers.

I am not a lawyer and I don't understand the rules by which the judge in the commercial case may or may not admit this into evidence. But if it is admitted it wouldn't be so much a demolition, more like a total obliteration.