Ex-Autonomy CEO Mike Lynch denies dodgy accounting practices

The recriminations between ex-Autonomy CEO, Mike Lynch and Hewlett Packard have started in earnest following the shock $8.8 billion write off announced this week with $5 billion relating to the August 2011 acquisition by HP.

Hewlett CEO Meg Whitman has accused Mike Lynch and his management team of accounting fraud, specifically of booking software licence revenues inappropriately and that the company had sold computer hardware at a loss to some of its customers treating part of the cost of these sales as a marketing expense in its accounts.

HP claims that revenues were inflated 10-15% and costs were hidden in order to increase its gross profit margin. It is alleged that the hardware sold by Autonomy had been unprofitable and had not run any of the company’s own software, though this is disputed by Lynch and he says the accounting treatment was approved by the auditors. Lynch said “HP came in with about 300 people, crawled over everything and you know what? They found nothing. And you know why? There was nothing to find”.

Autonomy’s previous auditing team, Deloitte’s, has also waded into the argument claiming that there were no issues with their accounting methods and disputed claims by some analysts that the books were always riddled with red flags.

Mike Lynch claims it is Hewlett Packard’s own mismanagement of Autonomy which has caused the issues at the company and that the accounting charges are a smoke screen. Lynch was ousted from the company in May 2012 after a disappointing set of second fiscal quarter earnings.

The due diligence process for the acquisition has been called into question. Though Léo Apotheker was in charge at the time of the announcement of the deal, current CEO Meg Whitman was a director at the company at the time and allowed the acquisition to close. The board had relied on accounting firm Deloitte for vetting Autonomy’s financials and that KPMG was subsequently hired to audit Deloitte. Boutique investment bank Perella Weinberg Partners to serve as its lead adviser, along with Barclays. Banking advisers on both sides of the deal were paid $68.8 million.

All in all, a sorry state of affairs for Hewlett Packard and it will be interesting to see if the SFO and SEC uncover any evidence to support the claims that Lynch and his team were “cooking the books” at Autonomy despite his strenuous denials this week.

Contrarian Investor UK