HP details Autonomy allegations

Richard Waters

Autonomy, the once high-flying U.K. software company at the center of fraud allegations, massively overstated its revenues and profits in the year before its $11 billion acquisition by Hewlett-Packard, the US technology company has claimed.

The claims mark the first time HP has detailed its charge that Autonomy padded its earnings by reporting sales before they were completed or improperly inflated the value of some of its contracts.

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In a statement, former executives including Mike Lynch, the Cambridge university computer scientist who founded and ran Autonomy, rejected the allegations and characterised them as part of an "ongoing accounting dispute".

Adam Jeffery | CNBC

The initial fraud claim, leveled in 2012, has led to investigations by the Department of Justice and Securities and Exchange Commission in the US, as well as the Serious Fraud Office in the U.K..

The latest allegations of accounting irregularities were contained in restated figures filed at Companies House in the U.K., which refer to "extensive errors (including misstatements)" in previous accounts. The accounts are for Autonomy Systems, which HP said accounted for the majority of Autonomy's U.K. business.

According to the revised figures, the unit's revenue came to only £81.3 million in 2010, less than half the amount the company had recorded before, while its pre-tax profits of £19.6 million were 81 percent lower.

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The HP purchase of Autonomy in 2011 marked a high point for the U.K.'s software industry, though that triumph was dashed a year later when the US company wrote down its purchase by $8.8 billion. Some $5 billion of the write down was due to the accounting misstatements, HP said.

Mr Lynch has claimed that the disputed transactions reflect a difference in accounting treatment between the U.S. and U.K.. The international accounting rules that U.K. companies follow allow sales to be recorded at an earlier stage than they would be in the U.S., he has said.

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On Monday, the former Autonomy executives also hinted that tax avoidance lay behind HP's accounting restatement. HP attributed most of the reduction in profits to a "transfer pricing" issue, which the Autonomy camp described as "a mechanism which often reduces a company's tax bill in the U.K.." As a result of the revision, the US company said it had asked the U.K. for a £37.4 million tax refund.

HP denied restating Autonomy's figures to reclaim tax, and said the transfer pricing adjustment reflected similar misstatements in Autonomy's overseas business to ones found in its U.K. accounts.

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HP said some of the sales that had been improperly booked by Autonomy in 2010 had involved "barter-type transactions" where parts of the deals did not have a proper economic basis. Others involved various service arrangements in which the accounting had been inappropriate, it said.

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Details of some individual Autonomy contracts that HP has questioned leaked out last month after the U.S. Air Force referred to them in a letter warning of a possible ban on Mr Lynch and other former Autonomy executives from doing any future work for the US government. In one, Autonomy was said to have paid $9.6 million for services to a contractor that owed it money, with the same amount later paid back to the U.K. company to settle the outstanding debt.

Although the sales claimed by Autonomy were modest given the billions HP paid for the company, the purchase was seen as significant at a time when HP was trying to boost its small software division. Autonomy's software for sifting through and making sense of large volumes of data was seen as a valuable addition that would help HP close deals involving a wider range of IT.