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Hewlett-Packard Walloped by Charge Relating to Fraud

Hewlett-Packard reported quarterly earnings that eat expectations on Tuesday, but only after excluding a huge accounting charge relating to allegations of fraud tied to the acquisition of its Autonomy software unit.

Mike Fuentes | Bloomberg | Getty Images

The company, in the midst of a multiyear turnaround plan, said alleged accounting "improprieties" at the acquired company led to a one-time accounting charge of $8.8 billion.

While avoiding calling it fraud, Hewlett-Packard said there was "serious accounting improprieties, disclosure failures, and outright misrepresentations at Autonomy" that was discovered during a nearly seven-month-long internal investigation.

HP's CEO, Meg Whitman, joined the company about a month after the computer giant purchased Autonomy for more than $42 per share. In an interview with CNBC Tuesday, Whitman strongly defended the company's due dilligence on Autonomy, but said there was a "willful effort" by the software maker to divert attention from the true state of its financials.

"We believed there is a willful effort on the part of certain members of Autonomy management to mislead shareholders when Autonomy was a publicly traded company, and to mislead potential buyers, including HP," Whitman said. "We stand by the forensic review that we've seen."

She added that while she regretted voting to approve the deal, she was convinced Autonomy could be salvaged and still add value to HP's bottom line.

"Now what we need to do is turn this over to the authorities, seek redress on behalf of HP shareholders to recoup what we can, and then we want to take the Autonomy business and grow it because it does solve a real need in the market place on the behalf of customers," Whitman said.

The accounting issues happened prior to its acquisition of British-based Autonomy for $11.5 billion in 2011, when Hewlett-Packard was criticized by analysts for overpaying. Among other things, Autonomy makes search engines that help companies find vital information stored across computer networks. Acquiring it was part of an attempt by Hewlett-Packard to strengthen its portfolio of high-value products and services for corporations and government agencies.

The company launched the investigation after a senior member of Autonomy's leadership team came forward, Hewlett-Packard said.

Mike Lynch, the former chief executive of Autonomy, is currently reviewing Hewlett-Packard's charges, his spokeswoman said. Lynch is listening in to a conference call being given by Hewlett-Packard and expects to comment later on the development, she said.

Prior to Hewlett-Packard's purchase of Autonomy, the U.K. company sought meetings with Hewlett-Packard competitor Oracle. When Lynch claimed negotiations with Hewlett-Packard were exclusive and never involved Oracle, Oracle gave him a harsh reminder in a website called "Please Buy Autonomy." "After the sales pitch was over, Oracle refused to make an offer because Autonomy's current market value of $6 billion was way too high," the company said in a statement.

Hewlett-Packard subsequently bought the company for nearly twice that amount.

After the announcement, Hewlett-Packard shares fell in pre-market trading. (Click here to get the latest quotes for Hewlett-Packard.)

The company posted fiscal fourth-quarter earnings excluding items of $1.16 per share, down from $1.17 a share in the year-earlier period.

Revenue decreased to $29.96 billion from $32.12 billion a year ago, as the company's share of the personal computer market shrank and sales of its printers declined.

The personal computer maker, which employs more than 300,000 people globally, is undergoing a restructuring aimed at focusing the sprawling company on enterprise services, in the mold of International Business Machines.

Analysts had expected the company to report earnings excluding items of $1.14 a share on $30.43 billion in revenue, according to a consensus estimate from Thomson Reuters.

Including charges, Hewlett-Packard's net loss for the quarter came to $6.85 billion, or $3.49 per share. That compares with net income of $239 million, or 12 cents per share, in the same period last year.

It was the company's second mammoth loss in a row. In the third fiscal quarter, it lost a record $8.86 billion, or $4.49 per share. That was due to a charge for another acquisition — that of Electronic Data Systems, a technology consulting service that it bought for $13 billion in 2009. In that case, Hewlett-Packard didn't blame improper accounting, just results that didn't live up to expectations.

The company said it sees full-year earnings per share of $3.40 to $3.60, in line with prior guidance, but its first-quarter outlook was lowered to 34 cents to 37 cents a share, well below expectations.

—The Associated Press and Reuters contributed to this report

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