Deals between the software company and “middlemen” prior to its acquisition by HP in 2011 said to be “questionable”, although Autonomy founder asserts the deals were signed off by auditor.
The Guardian reported on documents leaked by HP regarding several deals made by UK software company Autonomy with resellers of its software, whereby the resellers “bought the Autonomy products on credit in order to sell them on to a named user”, with the documents referring to deals with blue-chip companies Kraft, Eli Lilly and KPMG.
HP is using the documents in its attempt to prove that it had been misled by “serious accounting improprieties, disclosure failures and outright misrepresentations” made by Autonomy prior to its acquisition; although Autonomy founder Mike Lynch and his team have denied all allegations, blaming “bad management by HP” and “differences between British and American accounting standards”.
The Guardian reported that “a source with knowledge of the matter” had said that HP believed “dozens” of Autonomy’s contracts with resellers from January 2009 onwards were questionable. However, Autonomy said that during that period it signed 15,000 deals, with Lynch asserting that the company’s auditor, Deloitte, had been aware of and approved every transaction, including those that had been brought into question by HP, and that it had approved of the company’s accounting method.
The deals in question involved contracts with resellers “to buy software on credit and with little or no money changing hands up front”, with the contracts naming an end user “to whom the reseller intended to sell the software”. Autonomy, under UK accounting standards, “could count such promises as real revenues as long as the reseller signed a legally binding agreement stopping it from returning the software if it couldn’t find a buyer”.
However, the documents reportedly suggest that the resellers “were not always able to sell the software to the named end customer”, with the purchase from Autonomy cancelled in some cases and “at least one reseller” receiving financial compensation from Autonomy.
A reseller called Capax placed a $4 million (€3 million) order with Autonomy for software it intended to sell to confectionary company Kraft, making a $400,000 (€303,000) downpayment on the deal. However, Kraft arranged to buy directly from Autonomy, resulting in the software maker cancelling its sale to Capax but paying it $400,000 in compensation; with Capax’s original downpayment carried over to a new deal for software it intended to sell to Eli Lilly.
However, Eli Lilly also decided to purchase directly from Autonomy, but Capax “was made party to the contract, invoiced Eli Lilly for the software, and remained liable to pay Autonomy for it”.
Lynch defended the deals, accusing HP of conducting “selective disclosure” as “they have partially leaked details around a few deals, out of over ten thousand that took place, which were all reviewed and cleared by the auditors, including any fees, and recorded as such at the time. They were noted as extremely rare cases and the cash was received for all of them. In short they were handled correctly. HP needs to explain where the $5bn write-off came from, not run a smear campaign of selective facts and spin.”
Lynch added: “They want to destroy us through spin before the facts are tabled. If this was a multibillion-dollar fraud why were people paying us? There would have to be an enormous cash hole and there isn’t. If you have got cash coming in year after year, that’s a sustainable business.”
A source reportedly claimed that “HP and its advisers did not have access to the Deloitte audits or work papers during the due diligence process”; although Lynch’s spokesman said that “HP’s due diligence team was entitled to inspect all documents, and if there were documents they did not see, it was only because they were not asked for”.
Lynch, whom HP has accused of fraud, reportedly plans to sue HP for damages over the allegations, stating: “Autonomy was set up to change the software industry, it wasn’t just another application […] what is sad now is that dream will never come true.”