HP execs were aware of Autonomy's sales practices -- report

Hewlett-Packard knew about Autonomy's accounting issues long before it accused the firm of fraud, a new report says.

Charlie Osborne
Charlie Osborne Contributing Writer
Charlie Osborne is a cybersecurity journalist and photographer who writes for ZDNet and CNET from London. PGP Key: AF40821B.
3 min read

Hewlett-Packard senior executives knew of Autonomy Corp.'s sales practices and problems months before a whistle-blower exposed the company, according to new reports.

The US-based PC giant purchased Autonomy in 2011 for $11.1 billion. However, only a year later, Hewlett-Packard was forced to write down the acquisitions' value by $8.8 billion. A whistle-blower then came forward, stating that hardware sales conducted by Autonomy were often conducted at a loss. As a result, Hewlett-Packard has accused the firm of accounting fraud, which remains an ongoing saga.

The Financial Times reports that the PC maker's management knew about some of Autonomy's practices, based on documentation and e-mails between the two companies seen by the publication. If proved to be true, this revelation could weaken the argument that Autonomy concealed its accounts, as well as the idea that Hewlett-Packard did not know about the sales problems at the time the deal was made.

In e-mails seen by the Financial Times, Autonomy's practice of selling hardware to clients at a loss was disclosed in a paper trail documented by auditors and a report was provided to HP after it purchased the British company. A number of e-mails revealed that HP executives were included in conversations discussing the sales before the whistleblower brought the issues to light -- and to the attention of shareholders.

For example, in an e-mail sent in October 2011, Hewlett-Packard CEO Meg Whitman was copied in when Autonomy discussed the difficulties it was having selling the PC maker's hardware, according to the publication.

However, this evidence is contrary to Hewlett-Packard's previous statements to shareholders, in which it said it eventually learned about the hardware sales but knew nothing about alleged accounting issues until the whistle-blower came forward -- and after Autonomy was purchased. Hewlett-Packard accused Autonomy of selling hardware at a loss to glaze over shortfalls in the firm's revenues.

In contrast, documents seen by the Financial Times show that Hewlett-Packard was notified about the existence of hardware sales in the seven months between the closure of the acquisition and May 2012. It was not until November that the PC maker made its allegations public.

The publication writes:

"Large sales of hardware were routinely acknowledged in Autonomy audit reports seen by the FT. These were received by the audit committee, chaired by former Prudential boss Jonathan Bloomer, and signed off by auditors Deloitte. The audit reports were available to HP management after the acquisition, according to one person familiar with the company's finances."

In a statement, Hewlett-Packard said:

"Our investigation has shown that Autonomy often resold generic hardware at a loss in the last few days of the quarter with the sole purpose of masking its real financial performance.

In addition, Autonomy engaged in improper transactions with certain value-added resellers to create the appearance of software licensing revenue at the end of each quarter. In some instances, these transactions were used to accelerate revenue, and on numerous occasions, these were fabricated transactions with no real end-user."

Autonomy CEO Mike Lynch told the paper that the emails cited by the Financial Times show that Hewlett-Packard's allegations of accounting fraud and a lack of transparency are wrong, and Autonomy had always been open with its auditors. Lynch said that "Meg Whitman accused Autonomy of 'active concealment' but these revelations prove we were open and transparent with our auditors who continue to stand by the accounts."

This story originally appeared as "HP executives knew of Autonomy sales problems: report" on ZDNet.