HP's Accounts Bombshell: A Guide for the Perplexed

Agenda-Setting Financial Insight.
Nov. 26 2012 10:01 AM

HP's Accounts Bombshell: A Guide for the Perplexed

101238433
HP still has to prove its claim that it was duped by fraud

Photo by Darren Carroll/Getty Images

Hewlett-Packard claims it was duped into hugely overpaying for Autonomy, prompting an $8.8 billion writedown. It blames at least $5 billion directly on dodgy book-keeping. Autonomy founder Mike Lynch says his company played by the rules. But complicated procedures for categorising sales and recognising revenue are critical to the strength of HP’s three central allegations. 

Sales mix

Advertisement

Autonomy’s core product is search software called IDOL. HP claims Autonomy covertly lumped in loss-making hardware sales with deals for IDOL. The implication is that this inflated Autonomy’s valuation.

HP says there was no “appropriate” disclosure of the hardware sales. It’s not clear what that means. Autonomy did reveal in its annual reports that hardware was sometimes bundled in with software. This disclosure would probably have been lost on a casual reader: customers needing an IDOL solution in a hurry generated “appliance” revenue as part of a turnkey solution. But HP and its advisers arguably should have known this was an issue that needed clarifying. Moreover, the classification wouldn’t alter overall sales, profit or operating margins. 

Sales to resellers vs sales to real customers

Autonomy sold software to customers through so-called resellers. HP says Autonomy improperly booked revenue before resellers had found end-buyers. But under IFRS accounting standards, Autonomy was permitted to recognise revenue in such circumstances, if certain conditions were met. It is aggressive, but legal.

HP may not have realised its accounting policy here was legitimate, because U.S. GAAP accounting imposes stricter conditions. Without full access to the detail of the software contracts involved, it is hard to assess the force of the allegation. 

Long-term data-hosting revenue vs licence revenue

HP says Autonomy brought forward sales by converting long-term data-hosting deals into licence payments. But this would have been a very foolish move for Autonomy. Auditors allow companies to book upfront payments in full if they establish a predictable pricing framework, known as “Vendor Specific Objective Evidence” (VSOE).

It is hard for companies to abuse this by re-jigging the split of recurring and immediate payments in their favour: if pricing is inconsistent, VSOE no longer holds. Accountants can then push the company to recognise all revenue, including upfront payments, pro-rata over contract lifetimes. Again, without knowing the detailed terms of the contracts, it is hard to make an assessment.

HP says these allegations are only “examples”, so more may come out. As things stand, HP’s accusations are hard to judge. Both distortions in profitability and revenue growth would have affected valuation, but this would need to be extensive to create a $5 billion hole.

Many analysts had already accused Autonomy of aggressive accounting. HP still has to prove its claim that it was duped by fraud which could not be detected before acquisition. A complete refutation would mean yet more heads rolling at the gaffe-prone HP. But so too would an inconclusive result that showed Autonomy to be cavalier but no worse. 

Read more at Reuters Breakingviews.

TODAY IN SLATE

Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

Why Are Lighter-Skinned Latinos and Asians More Likely to Vote Republican?

A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

The XX Factor
Sept. 22 2014 12:29 PM A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

Subprime Loans Are Back

And believe it or not, that’s a good thing.

It Is Very Stupid to Compare Hope Solo to Ray Rice

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

How Ted Cruz and Scott Brown Misunderstand What It Means to Be an American Citizen

Divestment Is Fine but Mostly Symbolic. There’s a Better Way for Universities to Fight Climate Change.

  News & Politics
Over There
Sept. 22 2014 1:29 PM “That’s Called Jim Crow” Philip Gourevitch on America’s hypocritical interventions in Africa.
  Business
Moneybox
Sept. 22 2014 5:38 PM Apple Won't Shut Down Beats Music After All (But Will Probably Rename It)
  Life
Dear Prudence
Sept. 22 2014 3:33 PM Killing With Kindness My in-laws want to throw me a get-well-from-cancer bash. There’s no way I can go.
  Double X
The XX Factor
Sept. 22 2014 7:43 PM Emma Watson Threatened With Nude Photo Leak for Speaking Out About Women's Equality
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
  Arts
Brow Beat
Sept. 22 2014 9:17 PM Trent Reznor’s Gone Girl Soundtrack Sounds Like an Eerie, Innovative Success
  Technology
Future Tense
Sept. 22 2014 6:27 PM Should We All Be Learning How to Type in Virtual Reality?
  Health & Science
Science
Sept. 22 2014 12:15 PM The Changing Face of Climate Change Will the leaders of the People’s Climate March now lead the movement?
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.