Accounting Scandal of HP and Autonomy Case Study

  • Length: 6 pages
  • Sources: 5
  • Subject: Business - Law
  • Type: Case Study
  • Paper: #50448192

Excerpt from Case Study :

Autonomy Corporation Accounting Scandal

What fraud or other financial malfeasance took place?

Hewlett Packard on November 20, 2012 delivered a statement against Autonomy's unmentioned members of the previous management team accusing them of final impropriety. The shocking thing about the turn of events was that HP had accused the un-specified members of huge allegations and that too without any contact or notice to the Autonomy's CEO (Autonomy Accounts, 2012). However, all the allegations were denied by the Autonomy who during the past as the company of public had handled its finances according to the applied practices and regulations. These practices were also checked on by Deloitte LLC which is an independent auditor and it confirms the applicable procedures which were also commanded by the IFRS used in the United Kingdom (Autonomy Accounts, 2012).

A lot of spectators were shocked by the claims made by HP regarding the allegations which make up to 5 billion dollars. The calculations making up this amount were not published by HP and neither did it give any breakdown of the contributions for profit, cash flow and revenue (Autonomy Accounts, 2012). The hardware sold by the Autonomy would have no impact on the bottom or top growth of gross margin and it assumed a balanced state over time, but this was not realized by HP (Autonomy Accounts, 2012). The allegations of improper speed of revenue and inappropriate recognition of revenue were normally treated under International Financial Reporting Standards (Autonomy Accounts, 2012).

An important quantity of revenue has to be involved for justifying the accounting write down of 5 billion dollars. The issues were undetected amid the acquisition process and HP had failed to clarify the non-detection of such issues (Autonomy Accounts, 2012). The question is whether HP actually states that none of the write down of 5 billion dollar should be ascribed to the financial and operational mismanagement of HP since acquisition of Autonomy. Another question that came up was the amount of people given a job in 2011 by the Autonomy that have either resigned or left under HP's management (Autonomy Accounts, 2012). According to HP, Autonomy included a hardware which was not according to the accounting practice of IFRS, but it failed to state whether the senior management of HP and Ms. Whitman knew about the 2012 hardware sales. Some of the questions that rise from here are whether Autonomy being a part of HP continued selling the hardware of similar material value to a third party and was this included in the accounts of Autonomy and accounted by HP? Another question also comes up whether Ms. Lesjak and Ms. Whitman knew that Paul Curtis, Ernst & Young and KMPG by the end of 2011 had undertaken an extensive study of the revenue software of Autonomy and why did it take six months to senior management of HP to let the shareholders know about the likelihood of an Autonomy related event (Autonomy Accounts, 2012)?HP is a very emblematic company of technology which is historically respected and admired globally. Autonomy became a part of HP due to their belief for a hopeful future, so it was best for all the sides to handle the situation and resolve it on time (Autonomy Accounts, 2012).

HP in its November, 2012 statement emphasized that an alleged malfeasance took place in which some past members of Autonomy used the accounting improprieties, disclosure failures and misinterpretations to blow up the problems of the company's financial metrics. HP also said that Autonomy had committed a fraud and their efforts were leading towards misleading the buyers and the investors. The licensing transactions were used by Autonomy to accelerate revenue recognition in appropriate ways in order to create revenues when there was no existence of any customer at sale time.

2. How was the fraud or malfeasance discovered or brought to the attention of the authorities?

HP in August 18, 2011 announced its purchase of Autonomy for around 42.11 billion dollars with a 10.2 billion dollar share. This purchase was approved unanimously by Autonomy and HP's board of members (BBC, 2011). In May, 2011 after a noticeable revenue drop in the quarter previously, Autonomy CEO, Mike Lynch left the post (Slash Gear, 2012) after which in September, the post of SVP and GM Autonomy and Information Management Business Unit was given to Robert Young Johns (Hesseldahl, 2012). The following year in 2012, HP stated making a charge to take 8.8 billion dollars after accusing serious improprieties of accounting at Autonomy which were rejected by Mike Lynch who blamed HP's management for the issue within the company (De La Merced, 2012).

The fraud or malfeasance was discovered when there was a drop in revenues in the previous quarter of May 2011 after which HP accused Autonomy for committing improprieties. HP accused that the former members of Autonomy were involved in the financial impropriety which had resulted in HP filing a case against Autonomy.

3. What federal laws or other regulations did the issue(s) violate?

According to HP, Autonomy had booked the hardware sales to be software sales with a higher margin and they had recognized the income of licensing even before it had been earned and this occurred even before last year's acquisition. HP also says that it was Autonomy's plan to gain a high price by dressing up the financials (Henning and Solomon, 2012). In 2007, Autonomy had de-listed the shares in U.S. so the accounting fraud would not breach the Federal law of security as it would not be inside the jurisdiction of S.E.C, but Autonomy was also bought by HP in a tender offer that is not uncommon in Europe. This means that the case against the officers of the Autonomy could be constructed in the anti-fraud provisions included in the rules of tender offer and Rule 10b-5 in anti-fraud prohibition (Henning and Solomon, 2012). The issue that arises is that'd.E.C can bring the case over the company that is listed in another country which would be a stretch that the agency would not be willing to have (Henning and Solomon, 2012).

With the investigation of F.B.I of this particular case, it would be easy to pursue a criminal case and the fraud statute from the federal wire is likely to be the base for having an investigation from a grand jury as the communication among Autonomy and HP is also involved so long as it remains in the U.S. (Henning and Solomon, 2012). The Autonomy was originally in London so the Serious Fraud Office could end up performing heavy weight lifting. In the Theft Act of 1998, under section 17, the criminal charges can be applied against the person who without being honest produces any account or uses it knowingly that it can be misleading. The person found guilty of this crime is sentenced to 7 years and the Fraud Act of 2006 also allows that a manager or an officer of the company which is guilty of the fraud charges working in the company is convicted (Henning and Solomon, 2012).

These accusations create problems for the founder of Autonomy, Mike Lynch who has refused to accept the accusations (Henning and Solomon, 2012).However, the interesting thing is that HP could be investigated by the S.E.C itself and committed of some of the charges (Henning and Solomon). HP claims that Autonomy performed the machinations before the deal between HP and Autonomy was done so if there are any wrong information found in the statements, and then S.E.C would have to decide if the company has violated provision which require proper reporting of revenue and sales (Henning and Solomon, 2012). HP also has to maintain proper control internally in order for the S.E.C to investigate the check of HP over Autonomy (Henning and Solomon, 2012).

HP clearly gives the impression of claiming that there is nothing to see in the financial statement after it forestalled it, but SEC has to look into it since the problem consists of multi-billion dollars so HP could be involved in further investigation. HP can also file a civil case against the directors and officers of Autonomy, however, the shares of Autonomy were listed outside U.S. A similar case of Supreme Court in Morrison vs. National Australia Bank which resulted that the list could be brought that existed in the U.S. So, the purchase of HP does not seem to fit and it would now call for a case that is under the English law, which in this case might not favour HP (Henning and Solomon, 2012). Autonomy could also bring certain claims against its past officers and directors for violation of their duties, however, it would be difficult since it would require a lot of years and money (Henning and Solomon, 2012).

The officers and the directors of the Autonomy might not contain the required money and the insurance policy of the company might also exclude covering fraud. HP could also be target for lawsuits as the present shareholders of the company might sue the company…

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