Autonomy Acquisition Accounting Case: The Sales Story That Reached HP Investors

Autonomy’s accounting inflated the revenue behind Hewlett-Packard’s acquisition of the software company for about $11.7 billion in 2011, according to the Justice Department’s account of the criminal trial. It said the former chief financial officer inflated publicly reported revenue by as much as 17.9% in 2010. If you work in software revenue or acquisition diligence, the revealing gap is between the sales story and the transaction your team actually agreed.

The Autonomy acquisition accounting case follows the accounting representations into the acquisition announcement investors read. Our page on premature revenue recognition examines the wider pattern of moving sales into the period management wants to show. Here, the story also concerns what kind of business the buyer thought it was buying.

Software Growth Built on Broker Purchases

Autonomy paid intermediary brokers to buy its software and recorded revenue before standard accounting practices allowed it, according to the Ninth Circuit’s account of the criminal trial. The brokers often had no intention of selling the software to end users. Autonomy also backdated some deals to increase revenue for earlier quarters.

The Justice Department’s account of the criminal trial identified backdated contracts, round trips and channel stuffing among the methods used to inflate reported revenue. For an employee who saw the broker agreement or worked on the quarter’s close, the transaction’s terms explain how the reported growth was produced.

We connect the money movement to the agreement and the period in which the company recorded the sale, including any side agreement that changed the customer’s obligations. The employee who knows what the customer or broker was actually promised can explain a deal that the revenue total alone conceals.

Hardware Sales Inside a Software Story

Autonomy also sold hardware at a loss while presenting itself as a “pure software” company, the Ninth Circuit recounted from the criminal trial evidence. The Justice Department said the former finance chief and his co-conspirators concealed the scale of those hardware sales from investors and market analysts. The sales helped boost reported revenue while obscuring what produced it.

The court explained that revenue growth was an important measure of success for a technology company and helped make Autonomy an attractive target. Someone classifying products or reviewing sales margins would be examining the business behind that growth claim. We see hardware sold at a loss helping sell investors a software business. The losses still looked like growth.

The Acquisition Announcement Reached HP Investors

The false financial information reached people buying HP shares through the announcement of the acquisition. The criminal trial evidence described by the Ninth Circuit connected the former finance chief to both the information and its public use. During acquisition diligence, he and his co-conspirators used emails, press releases, video calls and telephone calls to misrepresent Autonomy’s finances to HP executives in the United States.

The court described a letter the finance chief signed on August 18, 2011, with a draft acquisition announcement attached. His assurance about information he supplied for the announcement read:

HP released the announcement that same day, claiming Autonomy had 87 percent gross margins in 2010 alongside its revenue growth. At the criminal trial, two HP shareholders testified that they bought HP stock based on the announcement’s statements about Autonomy’s growth. An equity research analyst testified that he used the announcement to advise investors.

The underlying revenue information, the answer given to the buyer, the executive’s written assurance and the announcement all concern the same business. We examine where those accounts diverged and who approved the version investors received.

How to Catch Accounting Fraud?

To catch accounting fraud, we compare what a company reported with the transaction terms, payments and decisions behind it. In an acquisition, that also means connecting the target’s internal information with its answers to the buyer and the eventual investor announcement. Autonomy’s criminal case makes those connections unusually visible.

The useful accounting evidence can sit in several parts of the business. For an analogous software acquisition, our comparisons would include:

• Contract versions and side terms. We compare the agreement that supported the revenue entry with the versions and communications showing what the parties actually agreed. The backdating described in Autonomy’s criminal case makes the contract date and the reporting period especially important.
• Customer and broker records. We compare the recorded sale with the customer’s or intermediary’s obligations, confirmations and payments. Autonomy’s broker transactions make the seller’s payments to the intermediary part of that inquiry too.
• Product classifications and margins. We compare the goods actually sold with the description of the revenue and the business presented to the buyer. Hardware invoices and the costs behind those sales matter when the public story is software growth.
• Diligence responses and approvals. We connect the buyer’s questions, the target’s answers and the approved announcement. In Autonomy’s criminal case, the finance chief’s signed letter tied him directly to financial information HP published.

A revenue employee may know why the quarter changed. A sales employee may know what the intermediary was promised. An acquisition analyst may know which answer reached the buyer. Each perspective can connect a reported number to a particular decision.

A 2019 review in Risk Governance and Control: Financial Markets & Institutions, Accounting Fraud: A Literature Review, examines statistical detection alongside whistleblowing and forensic accounting. It reports research finding that first-digit distributions could not reliably distinguish manipulated estimates from unmanipulated ones. For the software employee, explaining the broker’s actual bargain can be more useful than pointing to an unusual total.

When a Merger Repeats the Target’s Story

The SEC’s settled action involving Momentus and Stable Road shows a related acquisition-diligence problem. The SEC alleged that Momentus represented a failed in-space test as successful and concealed national-security obstacles. The SEC also alleged that Stable Road, the special-purpose acquisition company, repeated the target’s representations without reviewing the test results or adequate licensing documentation.

At Autonomy, the criminal evidence followed financial representations into HP’s investor announcement. In the Momentus matter, the SEC’s allegations followed claims about technology and operating obstacles into merger disclosures. For an insider on either side of an acquisition, the useful comparison is between the statement the buyer repeats and the records inside the target that support or contradict it.

The United Kingdom Business and the United States Evidence

Autonomy had headquarters in Cambridge in the United Kingdom and San Francisco in the United States. The Ninth Circuit described telephone and video calls between participants in the United Kingdom and California, emails originating or ending in California, and press releases distributed from England to California. The criminal case’s American connections ran through those communications and the financial information reaching HP investors.

The Ninth Circuit described how, after the acquisition, Autonomy’s new chief financial officer discovered errors in its publicly filed financial documents and decided to restate its finances for 2010. The Justice Department reported that the FBI and the Securities and Exchange Commission investigated the case. A federal jury convicted Autonomy’s former chief financial officer of conspiracy, wire fraud and securities fraud.

If your knowledge concerns a business abroad, we examine the company’s transactions, communications and investor statements with you. Our work with people reporting securities fraud from outside the United States starts with the connections their information actually shows. We bring in securities fraud whistleblower lawyers to assess how those facts fit a potential case.

What Insider Knowledge Can Change

Research also examines whether the prospect of whistleblowing changes corporate behavior. The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, from the University of Chicago Booth School of Business and Baruch College, studied companies held by state pension funds as states adopted False Claims Acts. It estimated a 5% to 9% reduction in accounting-fraud probability among exposed firms.

For readers considering reporting securities fraud, SEC whistleblowers can receive 10% to 30% of sanctions collected in an action with sanctions exceeding $1 million. False claims against the government involve a separate route. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We build the case with you and bring in securities fraud whistleblower lawyers to assess which program fits your information.

You Know What the Revenue Number Leaves Out

If you saw the broker arrangement, the backdated agreement or the diligence answer that concealed the real sale, speak to one of our Whistleblower Experts about how the revenue was built. We work alongside you to turn that business knowledge into your strongest securities whistleblower case and bring in securities fraud whistleblower lawyers who understand software revenue and acquisition disclosures. From the first conversation through the case, you have experts on your side who can connect the transaction you know to the story investors heard.