Autonomy profits slashed by HP accounts restatement
Autonomy, the British software company accused of large-scale fraud following a takeover by HP, misstated profits by a factor of more than five, according to revised accounts.
In 2010, Autonomy Systems Limited, the subsidiary responsible for its European trading, reported profit after tax of £105.7m. In the restated version, the company’s bottom line shows only £19.6m.
In the original accounts, audited by Deloitte, revenues were £175.6m. The restated turnover of £81.3m, signed off by HP’s auditors Ernst & Young and filed on Monday at Companies House, is less than half as much.
The dramatic shortfalls will be used by HP, itself under pressure over the disastrous acquisition, to support its allegations that under its chief executive Mike Lynch, Automony misrepresented its finances, leading the Silicon Valley giant to write down its value by £5.5bn. HP accused Mr Lynch and other former senior managers of “accounting improprieties” a year after the deal was completed in October 2011.
An HP spokesman said: “These restatements, and the reasons for them, are consistent with HP’s previous disclosures regarding accounting improprieties in Autonomy’s pre-acquisition financials.
“The substantial work necessary to prepare these accounts has revealed extensive accounting errors and misrepresentations in the previously issued 2010 audited financial statements, including the problems previously identified by HP.”
Ernst & Young said, however, that it did not have enough evidence to express an auditor’s opinion on the restated accounts.
The revised accounts represent the first time HP has published financial details to support its fraud allegations. Mr Lynch, who denies wrongdoing, has said its claims are based on a misunderstanding of the difference between international accounting standards and GAAP rules. HP has dismissed his claims in turn.
Mr Lynch founded Autonomy, which makes software for searching corporate databases, in Cambridge in 1996. It grew fast to report worldwide sales of $870m (£534m) in 2010, before HP outbid rivals to buy the business for £7.1bn.
His spokesman said on Monday: “We continue to reject these allegations by HP. Given the size of HP’s writedown, we are very surprised by the small size of these adjustments in Autonomy Systems Limited attributed to the ongoing accounting dispute, which represent a few per cent of group revenue.
“We know even these include revenue that will be recognised at a later time, under HP’s new approach.”
He suggested that a large portion of the restatement could be attributed to HP moving Autonomy assets offshore.
“Other causes of the change including explicitly stated changes in accounting policy. We note that a majority of the change in numbers is due to transfer pricing between jurisdictions, a mechanism which often reduces a company’s tax bill in the UK. We hope the UK government will take a robust position in rebuffing HP’s attempts to deprive it of over £38m in tax revenue.”
HP has filed a £38.4m rebate claim for taxes Autonomy paid in 2009 and 2010, arguing the bill was inflated by overstated profits. HMRC has not yet agreed to repay any sum.
HP’s allegations centre on the way Autonomy allegedly recognised revenues. HP claims sales were recorded when “collectability issues existed”, from “barter-type transactions” where no money changed hands for elements of the deals. HP said Autonomy also sold customised software services without accounting for the cost of changes and overvalued managed services contracts.
HP declined to provide full details of the transactions, saying it was cooperating with UK Serious Fraud Office and US Department of Justice investigations. It has said that its due diligence investigations of Autonomy prior to the acquisition relied on audited public accounts.
HP shareholders have accused the company’s directors of botching the acquisition during a period of boardroom conflict and have sued them in US court. Leo Apotheker, the HP chief executive who bought Autonomy, was ousted soon after terms were agreed and replaced by current leader Meg Whitman. She abandoned the software-focused strategy Autonomy was meant to deliver, yet completed the deal.