Fraud case defence Autonomy boss says HP knew how firm worked before takeover
HEWLETT-PACKARD took over Autonomy in a disastrous $11.7bn (£7.7bn) deal, despite being warned of accounting practices used by the British software company that it now alleges were fraudulent, it has been claimed.
A due diligence report produced by KPMG prior to the 2011 deal highlighted Autonomy’s sales of hardware “in limited situations” and the way it recognised sales to resellers rather than to end customers.
Dr Mike Lynch, the founder of Au- tonomy, who stands accused of leading a multibillion-dollar fraud and faces a $5.1bn High Court damages claim, argued yesterday that the report showed HP management knew or should have known how his company operated. He denies any wrongdoing.
A year after HP acquired Autonomy it took an $8.8bn write-down on the acquisition, the majority of which it attributed to the alleged fraud by Dr Lynch and his chief financial officer, Sushovan Hussain.
KPMG due diligence specialists highlighted issues in the Autonomy accounts such as “sell in vs sell through”.
The report said: “Target [Autonomy] recognises revenue for licence sales upon sell-in to its VARs [resellers] rather than on a end customers.”
The accountants also appeared to warn HP that Autonomy’s growth rate would be lower if American accounting standards were applied.
They also flagged up the fact that Autonomy sold hardware, another area in which HP said it was defrauded.
Dr Lynch said this also strengthened his defence, although KPMG’s report said Autonomy “will ship its software pre-installed on hardware to its customers”, while HP’s allegations focus on sales of hardware without software.
The due diligence report has been made public after a protracted legal battle in California between HP and shareholders, who sued its management over the Autonomy disaster.
Dr Lynch said: “It’s a great shame that HP has slowed releasing these key documents when they make it absolutely clear that it knew how Autonomy was functioning.”
He is due to file his formal response to HP’s claims at the High Court within weeks.
A spokesman for Hewlett-Packard said: “Mike Lynch and Sushovan Hussain conducted a systematic and sustained scheme to make Autonomy look like a rapidly growing, pure software company whose performance was consistently in line with market expectations. It was a lie.
“HP had no knowledge of Lynch and Hussain’s contrived sales to value-added resellers and other improper transactions and accounting practices, all of which artificially inflated Autonomy’s reported revenues, misrepresented its rate of organic growth and overstated its gross and net profits.”