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Autonomy founder casts doubt on HP's write-down numbers

updated 10:32 pm EST, Sat November 24, 2012

Lynch says HP's allegations 'utterly wrong'

Mike Lynch, the former CEO of Autonomy, has strongly denied allegations by HP that his former company had engaged in "serious accounting improprieties" and willfully misled shareholders regarding its financials. Lynch has not yet hired a lawyer, but he is reportedly sitting down with former clients of Autonomy in order to sort out the numerous charges HP has leveled against the company and its former management. A good deal of Lynch's protest appears to hinge on differences in accounting standards between American firms and some firms based in other countries.

HP shocked investors last week in announcing that it would be taking an $8.8 billion write-down on its 2011 purchase of Autonomy. HP executives, including current CEO Meg Whitman, leveled serious charges against Autonomy's former management, claiming that a senior Autonomy manager had come forward to reveal significant accounting fraud.

In a statement, HP said that there appeared "to have been a willful 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."

Lynch, according to Reuters denies HP's allegations as "utterly wrong," and points to differences in hardware and software accounting to explain away HP's charges.

HP charges that Autonomy was booking licensing revenue upfront before deals had closed, inflating its revenue beyond what the company had actually received. Further, HP says that Autonomy mischaracterized revenue from low-margin hardware sales as software sales. Autonomy would in the past sell hardware systems to some customers and take a loss on the sale in exchange for the client agreeing to market some Autonomy products. These transactions were charged as marketing expenses, and Lynch maintains that they accounted for less than two percent of total revenues.

HP has made a number of other charges against the company, including that Autonomy booked some licensing deals as revenue even though no products were bought. These sales were typically deals in which clients would resell Autonomy products to end-users.

Under the International Financial Reporting Standards -- devised by the International Accounting Standards Board -- such practices are relatively common. Companies operating under IFRS can recognize such sales as revenue if they are delivered in the current period with probable collection, a fixed and determinable fee, and no right of return policy. Under the Generally Accepted Accounting Principles commonly used in US firms, the sale must be completed before it can be claimed as revenue.

HP has alerted regulators both in the United States and in the United Kingdom to what it calls Autonomy's improprieties. It is uncertain what route regulators will take in the coming weeks, though Lynch says he has not yet hired a lawyer or spoken to either HP or investigators.

by MacNN Staff



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