Autonomy overstated profits by 80%, HP claims

by Richard Crump

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04 Feb 2014

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THE LONG-RUNNING dispute between Hewlett-Packard and Autonomy, the UK software company it bought for $11.1bn (£6.7bn), escalated yesterday when HP slashed Autonomy's previously published profit and revenue figures.

In restated accounts published on Companies House, HP has drastically revised the 2010 performance of Autonomy Systems Ltd, the UK group's main operating subsidiary, and claimed to have uncovered "extensive errors (including misstatements)" in the previously issued financial statements.

The claims are the latest volley in an increasingly bitter war of words between the technology giant and the former management team of Autonomy following HP's botched 2011 acquisition of Autonomy. A year after the deal was signed, HP wrote down the value of its purchase by $8.8bn, of which $5bn was attributed to accounting misstatements.

In the original accounts, audited by Deloitte, Autonomy Systems reported profit of £105.7m and sales of £175.6m. In the restated version, turnover was revised down to £81.3m and profit was slashed to £19.6m.

According to the accounts, many of the errors relate to recognition of revenue and costs, as well as to the accounting for investments, and to correct the balance sheet for balances denominated in foreign currencies not re-valued at the year end.

"These restatements, and the reasons for them, are consistent with HP's previous disclosures regarding accounting improprieties in Autonomy's pre-acquisition financials," HP said in a statement. "The substantial work necessary to prepare these accounts has revealed extensive accounting errors and misrepresentations in the previously issued 2010 audited financial statement, including the exact problems identified by HP."

However EY, HP's auditors, said it was unable to express an opinion on the restated accounts. In the auditors' report that accompanies the filing, EY said: "We have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion." EY was paid £1.1m for its work, the accounts state.

Mike Lynch, Autonomy's founder and former CEO, has argued that the difference between Autonomy's and HP's valuation of the company stem from different accounting policies applied under US GAAP and IFRS, a claim HP has rubbished as "patently ridiculous'.

In response to the restated accounts, a spokesperson for the former senior management of Autonomy, said they continue to reject HP's allegations.

"Given the size of HP's write-down, we are very surprised by the small size of the adjustments in Autonomy Systems Limited that are attributed to the ongoing accounting dispute, which represent a few percent of group revenue. We know even these include revenue that will be recognised at a later time, under HP's new approach," the spokesperson said.

He also suggested that other causes of the change include a change in accounting policy and transfer pricing between jurisdictions, a mechanism which often reduces a company's UK tax bill. The adjustments have seen HP make a £38.5m claim to HMRC for overpaid tax, a claim not currently agreed by the taxman.

"We hope the UK government will take a robust position in rebuffing HP's attempts to deprive it of over £38m in tax revenue," the spokesperson added.

Deloitte categorically denies that it had any knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements.

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