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[August 24, 2014]
Autonomy deals raise questions as HP row escalates: Files focus on structure of sales before tie-up in 2011 Autonomy founder says all were signed off by auditor
(Guardian (UK) Via Acquire Media NewsEdge) Autonomy's $11bn (pounds 6.6bn) sale to Hewlett-Packard faces further scrutiny after documents cast doubt over the structure of some transactions conducted by the British software firm before its takeover.
New evidence has come to light which, according to HP, raises questions over some deals with middlemen - resellers of Autonomy software - who bought products on credit in order to sell them on to a named end-user. The documents refer to reselling deals with three blue-chip companies: food group Kraft, drugs company Eli Lilly, and accountancy firm KPMG.
The news comes as a San Francisco court prepares to rule today whether a group of HP shareholders can settle a dispute with the US tech firm over the Autonomy transaction.
Autonomy's founder Mike Lynch and HP boss Meg Whitman have been at loggerheads since California-based HP announced in November 2012 that it was writing down the value of Autonomy by $5bn. HP said it had uncovered "serious accounting improprieties, disclosure failures and outright misrepresentations".
Lynch and his team deny all allegations of wrongdoing, attributing much of the problem to differences between British and American accounting standards. They blame bad management by HP.
"This was the first time you had a fundamental software technology business go worldwide out of the UK and they have destroyed it," Lynch told the Guardian.
One of the documents seen by the Guardian is a letter sent by Autonomy's then finance director during a 2011 review of Autonomy's accounting methods by the Financial Reporting Council (FRC), which polices what UK firms tell shareholders about their performance.
HP, which bought Autonomy in October 2011, has queried over $200m of the $1bn in revenues Autonomy reported in 2010. HP attributes $100m of the sum to a string of deals with resellers.
Lynch said its auditor, Deloitte, was aware of every transaction questioned, and approved Autonomy's accounting. A spokesperson for the auditor said: "Deloitte conducted its audit work in full compliance with regulation and professional standards." The deals centred around contracts with a reseller to buy software on credit. The contract would name an end user to whom the reseller intended to sell the software. Under UK accounting standards, Autonomy could count such promises as real revenues as long as the reseller signed an agreement stopping it from returning the software if it couldn't find a buyer.
But the documents suggest the resellers were not always able to sell the software to the named end customer. In some cases their purchase was cancelled. On 30 September 2009, the last day of a financial quarter, a reseller called Capax placed a $4m order with Autonomy for software it intended to sell to Kraft. Capax made a $400,000 downpayment on the deal. But in the following quarter Kraft arranged to buy the software directly from Autonomy. Autonomy cancelled its sale to Capax, and paid it a $400,000 one-off fee. The $400,000 downpayment Capax had made was carried over to a new deal, for software Capax intended to sell to Eli Lilly.
Details of the transaction emerged from a letter sent on 8 June 2011 from Autonomy's then finance director, Sushovan Hussain, in response to the Financial Reporting Review Panel, which acts for the FRC. In August, the panel said it "does not intend to pursue any of the above matters further".The regulator is now rechecking Autonomy's books.
The correspondence shows that on 31 December 2009, the last day of Autonomy's financial year, Capax signed a $6m purchase order for software for Eli Lilly. But the following year, with the money still outstanding from Capax, the pharmaceutical group decided to deal directly with Autonomy. Hussain's letter says Capax was made a party to the contract, invoiced Eli Lilly, and remained liable to pay Autonomy.
A second document highlights a deal with reseller Tikit. On 31 December 2010, Tikit signed for $6m of Autonomy software, which it hoped to sell to KPMG. But a letter dated 31 December and signed by Autonomy and Tikit appears to transfer some financial risk back to Autonomy. It promises nearly $1m of work to Tikit should the company not complete its KPMG deal by 30 March 2011. A spokesman for Lynch confirmed Tikit was eventually contracted to work with Autonomy for KPMG, and paid for the software. He added that software customers often sign deals at the end of a quarter and that most software vendors operate on a credit basis.
Lynch said: "This is another example of selective disclosure by HP. They have partially leaked details around a few deals, out of over ten thousand that took place, which were all reviewed and cleared by the auditors, including any fees, and recorded as such at the time. They were noted as extremely rare cases and the cash was received for all of them. In short they were handled correctly. HP needs to explain where the $5bn write-off came from, not run a smear campaign of selective facts and spin." (c) 2014 Guardian Newspapers Limited.
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