KPMG Due Diligence Report

Finally, after fighting in court to suppress its publication, HP  has been forced to make public KPMG’s due diligence report, which it had given to HP and its board prior to the acquisition of Autonomy. In it, KPMG pointed out Autonomy’s accounting practices.

Below is a link to the full KPMG due diligence report :

KPMG Due Diligence Report

The KPMG report is 44 pages in total. We have juxtaposed some of HP’s public statements with the relevant section of the due diligence report:

1. ACCOUNTING PRACTICES
HARDWARE

HP SAID:  “The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as ‘IDOL product,’ and the improper inclusion of such revenue as ‘license revenue’ for purposes of the organic and IDOL growth calculations.” HP Statement Regarding Autonomy Impairment Charge, 20 Nov 2012

HP SAID:  “These hardware sales were frequently reported as licenses.” Cathie Lesjak, 20 Nov 2012, AllThingsD, “What Exactly Happened at Autonomy?”

HP SAID:  “While HP eventually learned that a portion of Autonomy’s revenues were related to hardware sales, we knew nothing of the accounting improprieties, misrepresentations and disclosure failures related to such sales until after … an extensive investigation.” HP spokesperson, 17 Feb 2014, Financial Times, “HP/Autonomy investigation: Tangled web of hardware and resellers”

KPMG reported to HP’s board that:  “In limited situations, Target will ship its software pre-installed on hardware to its customers. Target recognizes revenue for the hardware in conjunction with the software license, when it is delivered.” KPMG Report, “Supporting analysis, Revenue recognition – delivery models (1)”

Pg. 26*

RESELLERS

HP SAID:  “The VAR sales were reported as licenses, and they weren’t, in some sense, real sales, because there was no end user.” Cathie Lesjak, 20 Nov 2012, AllThingsD, “What Exactly Happened at Autonomy?”

HP SAID:  “The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.” HP Statement Regarding Autonomy Impairment Charge, 20 Nov 2012

HP SAID:  “In Autonomy’s case, certain VARs were used to fabricate or accelerate what was then held out by Autonomy to be revenue and profits.” HP Claim No. HC-2015-001324, 17 Apr 2015, pg. 11, 30.2.1.1

KPMG’s report to the HP Board specifically noted:  “Sell in vs sell through: Target recognizes revenue for license sales upon sell-in to its VARs rather than on a sell-through basis to end customers.” KPMG Report, “Executive Summary, Key Findings – 2”

Pg. 15*

HOSTED

HP SAID:  “The structuring, or restructuring, of these [hosting] arrangements [...] was not genuinely in the furtherance of Autonomy’s business, but instead was for the improper purpose of providing a pretext for accelerating the recognition of revenue and profits so that the same were recognised at the commencement, or at the time of the restructuring, of the arrangement.” HP Claim No. HC-2015-001324, 17 April 2015, pg. 61, 103

 

KPMG reported to HP’s Board license/hosted arrangements, and Autonomy’s different accounting processes, with Autonomy’s growth rates and revenue recognition to be affected by the acquisition.i. “Hosted: Target sells its software as a hosted service that can be accessed via the internet and is installed on Target’s servers that are dedicated to the specific customer … These arrangements are comprised of a license to use the software via the Internet (usage based, pay as you go) over a specific term (usually three to five years). Some customers also have the option to take possession of the software, converting the arrangement into an on-premise solution.” KPMG Report, “Supporting analysis, Revenue recognition – delivery models (1)”

  • “[T]here may be differences which could impact the historical growth rate and the timing of revenue recognition post-closing” KPMG Report, “Executive summary, Key findings – 2”
  • “Potential Actions: When data becomes available, consider the US GAAP differences on historical growth rates and the potential impact on revenue recognition in immediate post-acquisition period” KPMG Report, “Executive summary, Key findings – 2”
  • “… It appears that many customers are purchasing licenses with a hosting arrangement, although, the fee for the license component may be decreasing” KPMG Report, “Supporting analysis, Revenue”

Pg. 26*

Pg.15*

Pg.15*

Pg. 30*

GROWTH RATES DIFFERENT

HP SAID:  “Autonomy was smaller, less profitable and slower-growing than we were led to believe.” Meg Whitman, 3 March 2013, Sunday Times, “HP sheriff rides out in hot pursuit of Autonomy”

 

HP was told by KPMG that differences between IFRS and US GAAP would impact historic growth rates: “we believe there may be differences which could impact the historical growth rate and the timing of revenue recognition post-closing. … When data becomes available, consider US GAAP differences on historical growth rates and the potential impact on revenue recognition in immediate post-acquisition period” KPMG Report, “Executive summary, Key findings – 2”
Pg. 15*
ACTIVE CONCEALMENT

HP SAID:  “You have active concealment,” John Schultz, HP’s General Counsel, said. “[Deloitte] obviously didn’t catch these issues at the time. It was difficult, if not impossible for HP to catch them.” 20 Nov 2012, Bloomberg, “HP Plunges on $8.8 Billion Charge From Autonomy Writedown”

HP SAID:  “[T]here were severe disclosure failures,” John Schultz, HP’s General Counsel, said. 20 Nov 2012, AllThingsD, “What Exactly Happened at Autonomy?”

HP SAID:  “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.” John Schultz, HP’s General Counsel, 20 Nov 2012, Reuters, “HP alleges Autonomy wrongdoing, takes $8.8 billion charge”

HP SAID:  “HP launched its internal investigation into these issues after a senior member of Autonomy’s leadership team came forward … This individual provided numerous details about which HP previously had no knowledge or visibility.” HP Press Release, 20 Nov 2012

All of Autonomy’s accounting practices are outlined in the KPMG report, which details accounting treatment of hardware, resellers, hosted, growth rates, etc.

  • Plus, HP could have gotten more info and declined. Call between KPMG and Deloitte on 17 Aug 2011 regarding KPMG’s outstanding questions:  “Gersh [KPMG partner] said that on the day after the call, he asked Andy Johnson [at HP] if HP needed further assistance from KPMG, but Johnson said that it did not. Gersh said that after the call with Deloitte he called HP’s Allison Strathmeier and told her about the Deloitte call. Gersh said he told someone at HP that he would like to obtain more information about the allegation regarding revenue recognition mentioned by Deloitte (the Hogenson allegations) in order to help KPMG analyse revenue recognition under GAAP. It does not appear that HP or KPMG followed up on this issue.” Proskauer Report, “KPMG’s Role – Call with Deloitte”

 

2. ORACLE
Concerns over intervention from Oracle and its potential access to due diligence driven by UK disclosure requirements:  “Was particular concern Oracle would take actions to interfere w/ acquisition – even if not a serious bidder:

  • Even if did not interfere, Oracle would have access to confidential interest that was provided to HP
  • Barbs traded in e-mails between Apotheker and Oracle bolstered concern
  • Advice sought as to what Oracle could do”

Autonomy Acquisition UK Overlay, pg. 236.

Email from Shane Robison to Leo Apotheker, 9 July 2011:  “We need to be careful about obtaining any non public information.” Autonomy Acquisition UK Overlay, pg. 237.

Email from Shane Robison to Marge Breya on 15 July 2011:  “At this point […] we don’t want to see any non public information. We can talk live if necessary.” Autonomy Acquisition UK Overlay, pg. 237.

Email to Shane Robison from Andy Johnson (HP Corporate Development) sent 15 July 2011:  “I asked Barclay’s to do some analysis of how the O company [Oracle] might interfere with our process…O[racle] can say they are interested after we announce and get access to all the diligence we have received so the takeaway is to be careful about our diligence so we don’t enable O[racle] to get a deep dive on sensitive data.” Autonomy Acquisition UK Overlay, pg. 236

Cathy Lesjak email to Shane Robison and Leo Apotheker on 1 September 2011:  “I wanted to make sure you had it, too. We believe this is just negative tactics by Hurd/Oracle. I am assuming that the due diligence that your team did with KPMG would have picked up any of these types of issues.” Internal HP Emails

3. BOARD
At the midnight hour, the night before the announcement, Ray Lane receives some “new news”, which leads him to call a last-minute meeting with no executives. No one knows what was discussed at the meeting, but despite concerns, Ray Lane backed the deal on the after Leo Apotheker reassures him. THE BOARD MINUTES FROM THIS MEETING HAVE DISAPPEARED. Proskauer Report, “ATS – August 17, 2011 OD Meeting

Leo Apotheker /Ray Lane argument: Ray Lane is “haunted.”  Leo replies “if Autonomy and more software isn’t the solution, what is the alternative?” Ray Lane never replies. Internal HP Emails

The Board, Leo Apotheker and Shane Robison never read the KPMG due diligence report. Proskauer Report, “Due Diligence – KPMG Report”

 

*Note that the page numbers quoted above relate to the page number of the PDF document not the page number of the report itself