Back in October of last year, we shared the news with you that HP had acquired control of Autonomy Corporation. The goal of this acquisition was obviously to kick start HP's entry into an ever expanding information management market. Unfortunately for HP, it appears that the financial condition of Autonomy was not all that it seemed.
In a statement issued today from HP:
“HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”
These "misrepresentations" and "accounting improprieties" have led to HP announcing a non-cash impairment charge of $8.8 billion related to Autonomy in the fourth quarter of its 2012 fiscal year. According to the press release, someone from Autonomy came forward after the departure of Mike Lynch, founder of Autonomy claiming that there had been questionable accounting and business practices.
HP went into investigation mode and has uncovered what it believes are some serious misrepresentations, for example:
- The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
- This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
- The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.
HP believes this was a willful effort on behalf of former Autonomy employees to inflate the financial metrics and make Autonomy more attractive to potential buyers and has referred this to the US Securities and Exchange Commissions Enforcement Division and the UK's Serious Fraud Office.
Should the results of this end up confirming HP's beliefs, this could lead to potential chargers against former Autonomy directors and executives. We will keep you apprised of future updates.