The recent accusation of HP against Autonomy, the British software company that HP bought for $11B, raises fingers in all directions. Who is it at fault- Autonomy management, the management of HP, the auditors, or the differences in the accounting standards? Let’s look at the issue and the various parties involved.
HP wrote down the value of Autonomy on its books from $11B to $2.2B. $5B of the $8.8B write off HP alleges is due to serious accounting improprieties and willful effort by Autonomy to mislead shareholders. According to HP general counsel John Schultz, Autonomy created more than $200 million in revenue over a two-year period from 2009, which would amount to 12.5 percent of Autonomy’s $1.6 billion in revenues in their annual accounts for 2009 and 2010. HP accuses that Autonomy booked licensing revenue upfront before deals closed thereby inflating revenue.
In his defense Mike Lynch, head of Autonomy puts part of the blame on the differences between International Financial Reporting Standards (IFRS) (Autonomy maintained books under IFRS prior to its accusation by HP) and US GAAP (The standard HP uses). IFRS as we know is broader and does not have strict rules; it has more room for interpretation vs US GAAP which is rule based.
The question is when HP was buying Autonomy did they not do their own due diligence. When a company spends $11B, the investors expect that they would have reviewed the financials and done thorough check of the acquiree. Why did HP not look into the books deeper? In their defense HP says they relied on the stamp from the auditors, Deloitte in this case.  Isn’t it the duty of the board and management to take an extra step and do their own due diligence!
Next party in this fiasco is Deloitte. Not only is Deloitte auditors of Autonomy but also of HP. The issue raises the topic again whether audited financial statements can be relied on completely. Are auditors doing their job properly, because if they were there would not be such big fiasco every few months?
Well I believe all these parties are to blame, HP for not doing their own due diligence, Autonomy for taking the most lenient interpretation of the standards, and Deloitte for not doing their job properly.

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