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November 21, 2012

Deloitte and KPMG among Autonomy and HP deal advisers

Work conducted by Deloitte and KPMG may be subject to investigation by the US Securities and Exchange Commission’s enforcement division and the UK’s Serious Fraud Office, regarding an alleged fraud at software company Autonomy.

Computer maker Hewlett Packard (HP) said an internal investigation had found that Autonomy, the subject of a recent $11.1bn acquisition, had inflated its financial results before sale.

HP said a forensic investigation carried out by PwC found "a serious number of accounting improprieties and misrepresentations", which has led to HP having to write off $5bn from the acquisition.

 

"We believe this was a wilful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers," HP chief executive Meg Whitman said in a video statement.

 

HP has referred the matter to the US Securities and Exchange Commission’s enforcement division and the UK’s Serious Fraud Office for civil and criminal investigation.

 

The HP acquisition was overseen by several different advisors including Deloitte, which carried out due diligence work on Autonomy. Subsequently, HP called in KPMG to review Deloitte’s work.Other advisors on the case include Barclays and several other legal advisors.

Deloitte UK said in a statement that the firm did not engaged by HP, or by Autonomy, to provide any due diligence in relation to the acquisition of Autonomy.

"Deloitte UK was auditor to Autonomy at the time of its acquisition by HP. Deloitte’s most recent audit opinion on Autonomy’s financial statements was for the year ended 31 December 2010 and was signed in February 2011," the firm said.

"Deloitte categorically denies that it had any knowledge of any accounting improprieties or misrepresentations in Autonomy’s financial statements. We conducted our audit work in full compliance with regulation and professional standards. We are unable to discuss our audit work further due to client confidentiality. We will cooperate with the relevant authorities with any investigations into these allegations."

KPMG said it had no comment for the time being.

HP said that following an investigation by PwC, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix. HP lists the following examples of accounting improprieties and misrepresentations:

  • 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.
  • This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
  • 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.

The investigation by watchdogs on both sides of the Atlantic is likely to take some time and will put both KPMG and Deloitte under significant scrutiny.

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