Note on the Letter from the United States Air Force

Over the past few days, several media outlets have reported on a private letter dated September 2013 from the US Air Force to members of the former senior management of Autonomy and others. The letter concerns the USAF conducting a review of potential future commercial relationships with the former senior management of Autonomy. The USAF letter cites allegations made against the Autonomy management team by Hewlett Packard on 20th November 2012 as the basis for this review. This is an understandable precaution for the US Air Force to take, given the nature of such public allegations made by HP.

We strongly reject HP’s allegations. The few examples seen to date in support of its allegations, such as those cited in the USAF letter, show that HP appears to have had a fundamental misunderstanding of IFRS accounting practices, and we vehemently deny anything improper.

Autonomy was fully transparent with its auditors and correctly represented its accounts. Autonomy’s transactions were entirely properly accounted for under IFRS and reviewed by Autonomy’s auditors as appropriate.

Moreover, in relation to the scale of the $5 billion write down taken by HP on the basis of these allegations, the deals cited in the USAF letter constitute a tiny number of deals of low materiality in the context of Autonomy’s size. Even if these deals had in some way been questionable, they would have had no effect to justify the write-down.

A year on from HP’s initial allegations, despite repeated requests we have still not received detailed allegations or the supporting evidence for them. Rather what we see from HP is unsupported accusations, leaks and PR spin rather than a direct conversation based on the facts.

We have responded to the US Air Force letter addressing the concerns they have raised. This is a private correspondence and it would not be appropriate to discuss it, or any specific issues contained within it, in public. However, given that these issues are being reported in the international media we feel it is important to make clear a couple of general points of fact in relation to the matters at hand:

Summary of Background and Our Response to the US Air Force

The allegations made by HP against Autonomy are false.  Autonomy’s auditor, Deloitte LLP (“Deloitte”), has publicly denied any knowledge of improprieties. Deloitte’s audit reports show that Autonomy was transparent with it and that it reviewed the matters now under consideration in detail.

Autonomy’s disclosure and revenue recognition practices were proper and fully consistent with the standards under which it reported – the International Financial Reporting Standards (“IFRS”) and International Accounting Standards (“IAS”).  Those standards differ from U.S. GAAP and, in many cases, allow for the recognition of revenue earlier than under U.S. GAAP.

As Autonomy’s outside auditor, Deloitte conducted full scope annual audits and limited scope quarterly reviews. As part of its review, it was Deloitte’s policy to review all sales contracts or invoices over $1 million and a sample of contracts worth more than $100,000.

Sales to Value-Added Resellers

Autonomy, like many other companies in the software industry, sold its products to value added resellers, or VARs. The term VARs frequently refers to companies that buy a product (such as software) and then resell that product to an end user together with other products or services.

Under IFRS, for revenue recognition purposes, the VAR is the customer of Autonomy, rather than any potential ultimate end user who might buy the software from the VAR. There is no IFRS revenue recognition requirement that, following the sale to a VAR, there be a subsequent sale from the VAR to an end user, or even that an end user be identified at the time of a sale to a VAR. The VAR assumes the risk of resale, which may occur at any time in the future.

The relevant accounting procedure is governed by IAS 18. Revenue from a sale by an entity such as Autonomy to a VAR buyer may be recognized so long as the five elements of IAS 18 are satisfied, as follows:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the entity; and

(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

The propriety of any revenue recognition decision is assessed based on the knowledge and circumstances at the time of the recognition decision, not with the benefit of hindsight.

Consistent with IFRS and IAS 18, Autonomy’s revenue-recognition policy provided that sales of IDOL product to a VAR were recognized when the software licenses subject to the sale had been “delivered in the current period, no right of return policy exist[ed], collection [wa]s probable and the fee [wa]s fixed and determinable.” The policy did not require sell-through to an end user before recognizing revenue from a sale to a VAR.  This policy was approved by Deloitte and the Audit Committee and disclosed in the ‘Notes to Consolidated Financial Statements’ section of Autonomy’s Annual Report.

Post Revenue Recognition Events

On a few occasions, following a sale to a VAR and the decision to recognize revenue, a VAR unexpectedly did not ultimately complete its anticipated onward sale.  This could occur because no end user purchased the software.  Those subsequent events do not invalidate the appropriateness of recognizing revenue at the time of sale to the VAR.

This is because, as discussed above, there is no end user requirement for revenue recognition and because the propriety of revenue recognition is assessed based on the circumstances at the time of recognition, and not in hindsight.

Purchases from VARs

As an initial matter, it is common for companies in the technology sector to both sell to, and buy from, other technology companies.  Indeed, it is our understanding that HP itself engages in such transactions.  On the small number of occasions when Autonomy did so, it properly accounted for them.  IAS 18 permits revenue recognition in these circumstances based on the fair value of consideration received for a sale. Deloitte ensured that the relevant elements were met on purchases from customers.