In the Financial Times articles of 17th February 2014 a number of new pieces of information came to light regarding Autonomy’s sales of hardware. The treatment of hardware sales is central to HP’s allegations of accounting impropriety against the former Autonomy management team, given that it constitutes the significant majority of the revenue HP has indicated is under dispute.
The new information provided by the FT shows that HP keeps on changing its position on these allegations. Whenever actual evidence becomes available, HP backtracks.
We would note that on November 20th and 21st 2012 HP made the following statements:
- That Autonomy “sold negative-margin, low-end hardware” and represented this as software revenue (HP statement)
- That up to 10-15 per cent of Autonomy’s sales were such hardware sales, and this was a “wilful effort…to inflate the underlying financial metrics of the company” (HP statement)
- John Schultz, Chief Legal Officer said, “They used low end hardware sales, but put out that it was a pure software company” (John Schultz, New York Times)
- That “critical documents were missing from the obvious places and it required that we look in every nook and cranny” (John Schultz, Reuters)
- That there was “active concealment”, and Deloitte, Autonomy’s auditor, “obviously didn’t catch these issues at the time” (John Schultz, Bloomberg)
However, the FT revelations now show that HP and its senior management were well aware of Autonomy’s hardware sales and its legitimate practice of sometimes selling hardware as a loss leader, and that all of these sales had been fully disclosed to Deloitte and appropriately reviewed and treated.
In response to these revelations HP issued a statement on 17th February 2014 that it had “eventually” become aware of the hardware sales before the so-called whistleblower made its allegations in May 2012. The documents cited by the FT show that this information was available and known to HP immediately upon acquisition, if not before, and the practice of selling hardware at a loss was well known by HP executives long before the “whistleblower” came forward.
Given that hardware accounted for over $160 of the $200m disputed revenue, this new information must seriously question the stated basis of HP’s write down.
We note that the FT has included some details of a transaction between Autonomy and Morgan Stanley, presumably from emails leaked to the FT by HP, which is presented as indicative of Autonomy’s hardware sales. The emails show that Autonomy did indeed sell hardware to Morgan Stanley at a slight loss, something Autonomy has always fully explained to its auditors and, indeed, directly to HP. The audit packs cited by the FT show that this was fully disclosed to the auditors, and accounted for in the appropriate manner.