HP reveals 'extensive errors' in Autonomy accounting

February 3, 2014: 5:11 PM ET
hp purchases autonomy
The review of Autonomy's 2010 and 2011 financials shows for the first time the scope of the software company's accounting tricks.
NEW YORK (CNNMoney)

An audit of Hewlett-Packard's Autonomy unit revealed that the software company grossly exaggerated its sales and profit before selling itself to HP for $11 billion in 2011.

The review of Autonomy's 2010 and 2011 financial documents, performed by Ernst & Young and filed with British regulators, shows for the first time the scope of the software company's accounting tricks. For example, one division of Autonomy overstated its 2010 revenue by 54% and its operating profit by 81%.

HP spokesman Michael Thacker called the accounting errors and misrepresentations "extensive."

In fact, that itself might be an understatement. HP's late-2012 discovery of Autonomy's accounting missteps in part led to a massive $8.8 billion writedown of the company.

One arm of Autonomy had understated its pretax loss, saying it was £22 million ($36 million) when it was actually £314 million ($513 million). Another part of Autonomy had overstated its pretax profit, claiming £43 million ($70 million) when in reality it had earned closer to £11 million ($19 million).

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HP (HPQ)'s purchase of Autonomy for $11 billion raised eyebrows at the time and is now considered among the worst in the company's history. (That's saying a lot for a company that made such disastrous acquisitions as Compaq and EDS).

HP had hoped Autonomy, which specializes in database search, would help it expand into the Big Data realm. The Autonomy purchase was among the final decisions by HP CEO Leo Apotheker before he was fired.

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Current CEO Meg Whitman said in November 2012 that a senior Autonomy manager came forward with the damning details shortly after Autonomy co-founder Mike Lynch left the company.

Lynch has continued to deny any wrongdoing. On Monday, a spokesman for Lynch said the report does not prove fraud. He believes HP is simply accounting for certain items differently than Autonomy did when it was a private company.

"The majority of this restatement seems to have nothing to do with the accounting dispute, but is rather HP moving things around," said spokesman Chris Blundell.

But HP slated them as proof.

"These restatements, and the reasons for them, are consistent with HP's previous disclosures regarding accounting improprieties in Autonomy's pre-acquisition financials," said HP spokesman Michael Thacker.

The news had little effect on HP's shares, which were down by less than 3% on Monday.

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