HP claims $5 billion of overpayment was due to fraudulent financial reporting

HP is going to take an $8.8 billion write-down related to its $11.1 billion acquisition of British company Autonomy Corporation PLC in October 2011.  HP asserts that much of the write down (approximately $5 billion) is required because of accounting irregularities, allegedly fraud, contained in the financials statements relied upon in association with the purchase.

Among the allegations are that Autonomy had been (i) booking the sale of computers as software revenue, but then recording the related manufacturing cost as a marketing expense and (ii) booking revenue from long-term contracts up front, instead of over time.  Both of these practices violate the matching principle, which is integral to Generally Accepted Accounting Principles (GAAP) based accounting.  The issues were brought to light by a senior Autonomy executive after the acquisition was complete and the former CEO had been ushered out.

The situation is currently under investigation by the SEC and lawsuits are soon to follow.  Notably the Autonomy financials were audited by Deloitte and also investigated by KPMG as part of the due diligence associated with the sale, yet neither noted the issues.

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