HP takes huge $ 8.8 b charge, claims bad accounting in British software subsidiary

REUTERS: Hewlett-Packard stunned Wall Street by alleging a massive accounting scandal at its British software unit Autonomy that will cost the company the majority of US$ 8.8 billion in charges.

It was the latest in a string of reversals that have renewed questions about the basic competence of the storied company’s board and senior managers.

HP said on Tuesday it discovered ‘serious accounting improprieties’ and ‘a willful effort by Autonomy to mislead shareholders’, after a whistleblower came forward following the ouster of Autonomy’s then-Chief Executive, Mike Lynch, in May.

The charge follows a nearly US$ 11 billion write down last quarter for the company’s EDS services division.

The technology company has been roiled in the past few years by a revolving door of CEOs, overall management turnover and challenges in its core personal computer and printer businesses.

HP’s stock slid to a 10-year low, dropping 12 per cent to US$ 11.71 in regular trading on Tuesday. Shares are down nearly 50% year to date.

Lynch ‘flatly rejected’ HP’s allegations and said he was ‘shocked’ but confident he would be absolved of any wrongdoing.

He had not been notified by HP about the allegation before it was made public, nor had he been contacted by any authorities, Lynch said in an interview with Reuters.

HP took US$ 8.8 billion in charges in the quarter, with US$ 5 billion tied to the problems at Autonomy. The rest of the charge related to the “Recent trading value of HP stock and headwinds against anticipated synergies and marketplace performance,” HP said.

HP said it has referred the matter to the US Securities and Exchange Commission’s enforcement division and the UK’s Serious Fraud Office for civil and criminal investigation. It said it would take legal action to recoup ‘what we can for our shareholders’.

HP Chief Executive Meg Whitman, who voted for the deal while she was on HP’s board, said the investigation of Autonomy’s finances - both external and internal will take multiple years as it makes its way through the courts in both countries.

“Most of the board was here and voted for this deal, and we feel terribly about that,” said Whitman on a call with analysts. “The board relied on audited financials, audited by Deloitte. Not Brand X accounting firm, but Deloitte,” she said, adding that KPMG was hired to audit Deloitte.

“Neither of them saw what we now see after someone came forward to point us in the right direction,” Whitman said.

HP alleged that Autonomy’s former management inflated revenue and gross margins to mislead potential buyers. It said Autonomy executives mischaracterized revenue from low-end hardware sales as software sales and booked some licensing deals with partners as revenue, even though no customer bought products.

HP said Autonomy claimed its gross margins were in the 40% to 45% range while realistically they were in the 28% to 30% range.

Moreover, Autonomy always represented itself as a software firm but 10% to 15% of its revenue came from money-losing sales of low-end hardware, HP said.

The company also claimed that Autonomy was booking licensing revenue upfront before deals closed.

HP has embarked on an internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy’s historical financial results, under HP General Counsel John Schultz after the whistleblower came forward in May.

Schultz said since the accounting troubles occurred prior to the acquisition of Autonomy, it took a long time before HP was in a position to make the news public.

“Not surprisingly, Autonomy did not have sitting on a shelf somewhere a set of well-maintained books that would walk you through what was actually happening from a financial perspective inside the company,” he said. “Indeed critical documents were missing from the obvious places, and it required that we look in every nook and cranny.”

Whitman said her predecessor, Leo Apotheker and the Former Chief Strategy Officer, Shane Robison, were the key people behind the Autonomy acquisition.

Apotheker bought Autonomy to diversify HP’s business and beef up its portfolio to provide one-stop shopping for corporations. The US$ 11 billion acquisition of Autonomy heavily criticized by investors as too costly was a key part of the plan to transform HP.

Apotheker was ousted as CEO in September 2011 after just 11 months on the job and Robison left soon after.