Case 8-5 Autonomy Background On November 20, 2012, Hewlett-Packard (HP) disclosed that it had discovered an accounting fraud and has written down $8.8 billion of the value of Autonomy, the British software company it bought in 2011 for $11.1 billion, after discovering that Autonomy misrepresented its finances. In May 2102, HP had fired former Autonomy CEO, Dr. Michael Lynch, citing poor performance by his unit. According to HP, its internal probe and forensic review had uncovered that the majority of the impairment charge, over $5 billion, is linked to serious accounting improprieties, disclosure failures and outright misrepresentations discovered by HP's internal investigation into Autonomy's practices prior to and in connection with the acquisition. The Autonomy investigation began after an unnamed senior member of Autonomys leadership alleged there had been a series of questionable accounting and business practices prior to the acquisition. HP said the whistleblower gave numerous details that HP previously had no knowledge or visibility of. HP said it has discovered "extensive evidence" that an unspecified number of former employees of Autonomy had cooked the books prior to HP's $11.1 billion acquisition of the software company. The probe determined that Autonomy was substantially overvalued at the time of its acquisition due to misstatements of financial performance, including revenue, core growth rate and gross margins. HP added that it was co-operating with the U.S. DOJ, the U.S. SEC and the UKs Serious Fraud Office. The Autonomy disclosures are the latest efforts by CEO Meg Whitman to clean up the mess she inherited from former CEO Leo Apotheker, who HP reminded shareholders presided over the disastrous Autonomy deal. In a statement, Apotheker said he is both "stunned and disappointed to learn" of the alleged accounting improprieties and the developments "are a shock to the many who believed in the company, myself included." Apotheker said the due diligence process was "meticulous and thorough" and "it's apparent that Autonomy's alleged accounting misrepresentations misled a number of people over time not just HP's leadership team, auditors and directors." Autonomys Position A spokeswoman for fired CEO Lynch told Reuters that the HP allegations are "false" and Autonomy's management was "shocked to see" the fraud charges. Lynch said HP's due diligence was intensive and the larger company's senior management was "closely involved with running Autonomy for the past year." Lynch further commented that: HP is using this as a ruse to distract investors from its bigger problems: "People certainly realize I'm not going to be used as Hewlett-Packard's scapegoat when it's got itself in a mess." HP's numbers don't add up. It's questioning about $100 million in revenues, yet blaming $5 billion of the write-off on fishy accounting. He wants HP to explain in detail how it came up with the $5 billion in write-offs from alleged fraud. He not only denies all wrongdoing but says he has backup because Autonomy was audited quarterly and every invoice over 100,000 euros ($129,000) was approved by auditors. Lynch also said that some of the accusations are misleading because Autonomy was following IFRS, as British companies do, not the GAAP standard used by HP, which means it recognizes revenue differently in certain situations from U.S. practices. Accounting and Auditing Issues Interviews in California and England with former Autonomy employees, business partners and attorneys close to the case paint a picture of a hard-driving sales culture shaped by Lynchs desire for rapid growth. They describe him as a domineering figure, who on at least a few occasions berated employees he believed werent measuring up. Along the way, these people say, Autonomy used aggressive accounting practices to make sure revenue from software licensing kept growingthereby boosting the British companys valuation. The firm recognized revenue upfront that under U.S. accounting rules would have been deferred, and struck round-trip transactionsdeals where Autonomy agreed to buy a clients products or services while at the same time the client purchased Autonomy software, according to these people. The rules arent that complicated, said Dan Mahoney of the accounting research business organizationCenter for Financial Research and Analysis (CFRA), who covered Autonomy until it was acquired. He said that Autonomy had the hallmarks of a company that recognized revenue too aggressively. He said neither U.S. nor international accounting rules would allow companies to recognize not-year collected revenue from customers that might be at risk. In a statement issued on November 30, 2012, HP said its ongoing investigation into the activities of certain former Autonomy employees had uncovered numerous transactions clearly designed to inflate the underlying financial metrics of the company before its acquisition. The company said it is confident the deals are improper even under the international accounting standards Lynch cites. In an interview with the British publication, The Guardian, on April 10, 2013, Meg Whitman said that the board, which approved the Autonomy transaction, relied on audited information from Deloitte & Touche and additional auditing from KPMG, though she said that shes not blaming the accountants. Neither of them saw what we now see after someone came forward to point us in the right direction, Whitman said. Deloitte, which served as Autonomys auditor in the U.K., and KPMG, which performed the acquisition work for HP, are under fire for allegedly failing to detect the accounting issues. Deloitte, said in a statement that it cannot comment further on this matter due to client confidentiality and that it will cooperate with the relevant authorities with any investigations into the allegations.

In one of the cases discussed in class, Hewlett-Packard (HP) bought Autonomy and then claimed that Autonomy had materially over-stated its revenue. Discuss the ethical implications of both parties actions (HP management and Autonomy management)