HP: Autonomy had 'serious accounting improprieties'

HP: Autonomy had 'serious accounting improprieties'

Summary: Autonomy had 'serious accounting improprieties, disclosure failures and outright misrepresentations' when HP bought it, the company has said.

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TOPICS: Hewlett-Packard
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HP took a massive charge related to its purchase of Autonomy and indicated that it bought the company based on pumped up and fraudulent accounting.

In its fourth quarter earnings report, HP recorded a charge of $8.8 billion in its software unit. Then HP dropped this bomb:

The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term.

In other words, HP not only bought a clunker for $11.1 billion and decimated its balance sheet. HP bought Autonomy under false pretenses. Automony was using hardware sales to pump up its results. The problem is that Autonomy is a software company. 

The Autonomy acquisition was part of former CEO Leo Apotheker's plan to make HP more of a software-based company. However, Whitman stuck with the Autonomy purchase when she took over. Apotheker said the due diligence on Autonomy was solid and former Autonomy CEO Mike Lynch rejected HP's allegations.

Whitman explained the Automony investigation on an earnings conference call. 


These in improprieties were discovered through an internal investigation after a senior member of Autonomy's leadership team came forward following the departure of Mike Lynch on May 23rd. Based on this information, HP initiated an intense internal investigation into the allegations including a third party forensic review of Autonomy's historical financial results. HP has contacted the SEC's enforcement division and the UK's serious fraud office. We have requested both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek regress against various parties in the appropriate civil courts to recoup what we can for our shareholders. I want to stress that we remain 100% committed to autonomy and its industry leading technology. We will continue to fully support our new and existing customers and we believe autonomy technology will play a significant role in our growth strategy over the long term.

The company's fourth quarter report was a mixed bag. HP reported a fourth quarter loss of $6.9 billion, or $3.49 a share, on revenue of $30 billion, down 7 percent from a year ago. Non-GAAP earnings, which exclude the massive Autonomy writedown were $1.16 a share.

Wall Street was expecting earnings of $1.14 a share on revenue of $30.4 billion.

For fiscal 2012, HP reported a net loss of $12.7 billion, or $6.41 a share, on revenue of $120.4 billion.

As for the outlook, HP projected first quarter non-GAAP earnings of 68 cents to 71 cents a share. Wall Street was looking for 85 cents a share. Fiscal 2013 non-GAAP earnings will be $3.40 to $3.60 a share. Wall Street was expecting $3.50 a share. 

Investors sent HP shares about 12 percent lower to a 10-year low. 

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Whitman reiterated that HP is a multiyear turnaround project. On a conference call, Whitman said:

Fiscal 2012 was the first year in a multi-year journey to turn HP around. We know where we need to go. We have a plan to get there and we have already made significant progress towards our goal.

Indeed, HP's business units were under pressure across the board. Personal systems revenue fell 14 percent as PC sales slid. Printing revenue fell 5 percent; services fell 6 percent from a year ago; Enterprise servers, and storage and networking sales fell 9 percent from a year ago.

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Analysts largely expected HP's PC business to be under pressure and the results paid out as expected. Notebook and desktop units were down 12 percent in the fourth quarter. 

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On the enterprise side of the business, Whitman said HP saw pressure with its industry standard server business, but 3Par storage performed well. Whitman added:

Our server business saw double digit growth again in hyperscale, but this business is putting pressure on our overall ESSN margins. Our Gen 8 rollout continues to track positively although we saw pressures on our pricing and margins as we work to improve our channel execution.

By the numbers:

  • HP's R&D spending was $3.4 billion for fiscal 2012, up from $3.25 billion in 2011.
  • Inventory at the end of the quarter was $6.3 billion, and days of inventory at 25 days, down two days from a year ago.
  • HP bought 7.6 million of its shares on the open market.
  • HP ended the quarter with $11.8 billion in gross cash.

Topic: Hewlett-Packard

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44 comments
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  • This is massive fraud

    'Mistakes' after 'mistakes'... HP didn't do any home work or research before they purchased Autonomy... now they are writing it off... or is it just another face for fraud???... 9 billion is a lot of money !!!!!
    owlllnet
    • Perhaps Meg and/or whoever does the due diligence . . .

      has too much autonomy.
      rhuppert
      • Meg Whitman inherited this.

        This deal was done by Leo Apotheker. The 'due diligence' was done by Deloitte and by KMPG, apparently in much the way Arthur Anderson did due diligence in its auditing of Enron's books.
        msalzberg
        • And....

          Approved by the Board on which she was sitting, I believe.

          Now the Board may have been captured by the Chair and CEO, and, any way, isn't expected to vet due diligence. Still, it is their job to look out for shareholder interests: was it likely that the 8 billion would pay off? Does a deal that has 63% of its value (including goodwill) illusory smell like a field of daisies?
          DannyO_0x98
        • Mergers...

          I wonder if the 2002 merger between AAndersen UK and Deloitte UK brought too much best practices along the way
          jmfcosta@...
        • Same old - same old

          .... and so it goes again ...................
          da philster
  • Caveat Emptor

    https://en.wikipedia.org/wiki/Caveat_emptor

    Unless you can pin anything on the people who signed off their legal financial accounting audits.
    neil.postlethwaite
  • Dumb and dumber

    "The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term."

    Yow! I know HP has had its problems, but can't the company hire a decent writer?

    Not only am I unimpressed by the incorrect usage of "majority" (whatever happened to the word "most"?), but I'm staggered by the sentence length as well. William Faulkner might get away with writing 100-word sentences, but this writer can't.
    sissy sue
    • Oh, get over yourself.

      ^
      Jeez, did anybody order the over-the-counter English lecture?
      I have here 1 (one) order of a pompous, self-righteous, unnecessary (and wrong, might I add) pseudo-English lecture.
      Anyone?
      pauloforte
      • Disagree

        I think she made a good point.

        I disagree with your point, and your needlessly harsh tone.
        twilightmoon
        • I explain.

          Not to turn this into an English discussion, which was exactly what my post was meant to convey - apparently not very successfully, given your comment -, and not to take one single comma out of said post, I will just say this by means of an explanation at length: just because a sentence has more than 30 words and half of those have more than 10 letter in them, it doesn't make it any less necessary or correctly written.
          As for my tone, what's more out of place: what I said, or a comment on "corporate English" using wrong arguments and feeling the need to bring Faulkner up out of the blue in a blog on Technology...?
          pauloforte
          • So...?

            "As for my tone, what's more out of place: what I said, or a comment on "corporate English" using wrong arguments and feeling the need to bring Faulkner up out of the blue in a blog on Technology...?"

            For someone who thinks this blog is no place for a comment on "corporate English," you certainly are making enough stink about it.
            sissy sue
      • I think she's right

        And given the amount of truly tortured corporate prose out there (often designed more to obfuscate than to inform), it's proper for her to make the point.
        John L. Ries
    • Well said

      I agree: corporate speak is mostly gibberish that could randomly be typed by trained baboons.Still, this is hardly the most opaque corporate speak that I have seen.
      twilightmoon
    • Doesn't mean exactly the same thing

      When I hear "the majority of the charge" I expect it to lie in the 50-75% range. "Most" would imply an even larger share, perhaps 80% or more. The writing is a bit stilted, even omitting the use of "majority", but that's par for the course in this kind of corporate announcement.
      mark@...
      • Well . . . actually, they are synonymous.

        Both most and majority are the greater part or number; the number larger than half the total => 50% + 1 (at the least). The words do not imply your numbers, you are inferring them.
        rhuppert
    • Majority

      Not to poke a hornet's nest but...

      A majority is any subset of a larger set that consists of more than half of the larger set's elements.

      Therefore I fail to see how she used majority incorrectly if more than 50% of the expense was related to such impropriety on the part of Autonomy.
      falerin@...
      • Majority

        The Columbia Guide to Standard American English:

        There is a good deal of objection to the use of majority with a mass noun: not the majority of his argument, but most of his argument. The majority of those present is Standard, but The majority of the audience is Informal and Casual at best; Most of the audience is Standard.

        "Most" is a completely acceptable word. The fact that it only has one syllable doesn't change that.
        sissy sue
    • Do you understand that long sentence?

      I do, and I'm not that smart.
      msalzberg
      • I understand it....

        ...and I don't like it.
        sissy sue