HP takes $8.8 billion charge saying Autonomy fabricated finances

Deloitte Dependence

Hewlett-Packard began investigating Autonomy’s finances after a senior executive at Autonomy came forward after founder Mike Lynch, 47, departed in May, Hewlett-Packard said. The company said it has referred the matter to U.S. and U.K. securities regulators and will also pursue civil litigation.

“The board relied on audited financials -- audited by Deloitte -- not Brand X accounting firm but Deloitte,” Whitman said today on a conference call with investors. “The CEO at the time and the head of strategy who led this deal are both gone -- Leo Apotheker and Shane Robison.”

Autonomy’s former top management team said allegations by Hewlett-Packard are “false,” according to Vanessa Colomar, a spokeswoman for Lynch.

Lynch, in an interview with the Wall Street Journal, said Hewlett-Packard has mismanaged the Autonomy deal and that the company is “trying to cover it up with this big writeoff.”

Jamie Harley, a spokesman for Deloitte; Judith Burns, a spokeswoman for the U.S. Securities and Exchange Commission; Jina Roe, a spokeswoman for the U.K. Serious Fraud Office; and Chris Hamilton, a spokesman for the U.K. Financial Services Authority, declined to comment. Robison didn’t return a call seeking comment.

‘Stunned, Disappointed’

Apotheker said he’s “stunned and disappointed” by the alleged improprieties and that he did thorough due diligence on the acquisition. He agreed to buy Autonomy, the second-largest U.K. software maker, for $10.3 billion to expand in cloud- computing and add software that searches a broad range of data, including e-mails, music, videos and posts on social networks such as Facebook Inc.

Autonomy misrepresented its gross profit margin and also falsely created or miscategorized more than $200 million in revenue over a two-year period starting in 2009, John Schultz, Hewlett-Packard’s general counsel, said in an interview. Autonomy was reselling Dell Inc. computers and counting those sales as software revenue, he said. Some sales were also fabricated through resellers.

“You have active concealment,” Schultz said. Deloitte “obviously didn’t catch these issues at the time. It was difficult, if not impossible for HP to catch them.”

Latest Writedown

This isn’t Whitman’s first writedown related to a deal done by one of her predecessors. In August, Hewlett-Packard wrote down by $8 billion the value of the enterprise-services unit forged by ex-CEO Mark Hurd’s $13.2 billion purchase of Electronic Data Systems Corp. in 2008.

While accounting issues were responsible for the majority of the charge from Autonomy, Hewlett-Packard said a portion was also caused by the recent trading value of its shares.

Profit excluding some items will be 68 cents to 71 cents a share for the period, which ends in January, Hewlett-Packard said in a separate statement. Analysts on average had estimated profit of 85 cents a share, according to data compiled by Bloomberg.

Whitman is paring product lines and cutting staff to make the supplier of PCs, printers and data center gear more competitive. The company, once a hotbed of invention and the world’s biggest PC maker, has suffered from declining sales and has been late to develop mobile and cloud computing products.

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