Presentation of Financial Information
Reflecting on the yacht incident at the coast of Sicily last week, in which the founder and former CEO of the software company Autonomy and others tragically lost their lives.
Autonomy was a successful software company offering innovative data analysis solutions since 1991.
“Bayesian inference”, a statistical method invented in 18th century, was at the heart of its software.
💲 Hewlett-Packard acquired Autonomy in 2011 for $11.1 billion in cash.
Just one year later Hewlett-Packard wrote down almost 80% of their investment ($8.8 bil.).
More than $5 billion of the impairment should have been linked to “serious accounting improprieties, misrepresentation, and disclosure failures”. *
Thirteen year-long legal battle followed, in which Hewlett-Packard raised charges against the former CEO, Mr. Lynch, and the VP of Finance at Autonomy.
The U.S. Department of Justice initiated criminal investigation.
The UK court found in favor of H-P and extradited Mr. Lynch from the UK.
In the US court, Mr. Lynch was acquitted of all charges on wire and securities fraud just two months ago.
✍ Accounting:
What happened at the accounting heart of this case?
🖱 Hardware sales:
Autonomy sold not only software (as licenses), but also third-party hardware (servers, laptops, etc.) to their customers.
Hardware sales in Q1 2011:**
Revenue: $12.2 mil. Cost of Goods Sold: $13.9 mil. ➖ Loss: $1.7 mil.
🔦 What Autonomy did was reallocating $3.8 mil. of the $13.9 mil. to Sales & Marketing resulting into presentation of gross profit instead of loss:
Revenue: $12.2 mil. CoGS: $10.1 mil. ➕ Gross Profit: $2.1 mil.
This is almost too simple of a “profit & loss” cosmetics - any audit assistant would have spotted that in her first year of practice.
And, of course, the auditor did:
“Why are they still doing this? ....it need to stop!”**..except, it did not.
In 2012 Hewlett-Packard laid-off approx. 8% of their workforce resulting from "off-track" record of the company over the past years. One of the claimed missteps was the acquisition of Autonomy.
This case illustrates how important sound and fair accounting practice is.
It also shows a practical context for new, improved standards such as the new IFRS 18 Presentation and Disclosure in Financial Statements.
📍 Disclaimer: this post was written without prejudice and is based solely on facts and sources available to general public, e.g. reports and press articles. It does not challenge or negate any court or legal decision in the mentioned case.
🕯 I also want to express sincere condolences to all victims of the tragedy.
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