The Air Force Has Swooped In And Declared That Autonomy 'Deceived' HP

Meg WhitmanLinkedIn/HPHP CEO Meg Whitman

The Air Force has come to Hewlett-Packard’s defence saying that it believes Autonomy was cooking its books before HP bought it for $US11 billion.

As you might recall, less than a year later after that acquisition, HP wrote off $US8.8 billion and alleged that it was duped into paying too much because Autonomy had improperly inflated its revenues and margins. HP called it fraud, named a whole bunch of ways that it believed Autonomy had done this, and asked for investigations by the authorities.

The situation was a major embarrassment for HP and led to a number of its board members resigning.

Autonomy’s founder, Mike Lynch, has consistently and vehemently denied all wrongdoing, claiming that HP’s own mismanagement of Autonomy after the purchase is what caused the write-down, he told Business Insider. Investigations in the U.S. and the U.K. are still pending.

Enter the Air Force. It was conducting an investigation into the business practices of a government contractor, MicroTech after The Washington Post wrote a series of articles about MicroTech. Those stories helped spur investigations of the contractor by a couple of Congressional committees, the Small Business Administration, and the Air Force. At issue was how MicroTech was receiving big government contracts designated for small businesses run by disabled vets.

MicroTech had been an Autonomy reseller. In looking into MicroTech, the Air Force obtained HP’s internal investigation into Autonomy, it said.

The Air Force concluded that MicroTech helped Autonomy inflate revenue numbers, it said in a 5-page letter obtained by Business Insider.

The Air Force sided with HP writing:

From 2007-2011, former Autonomy senior management engaged in numerous accounting and sales practices designed to deceive analysts, investors, and potential purchasers into believing that Autonomy could, and would continue, generate margins and revenues that it could not ultimately sustain due to such practices.

The Air Force letter named several ways that Autonomy allegedly inflated its revenues and margins, a list that mirrors what HP said when it make the initial allegations of fraud: not properly booking hardware sales, hosting agreements, and deals with resellers.

For instance, the Air Force letter discussed one transaction between Autonomy and MicroTech regarding an $US11 million deal. Autonomy recognised $US11 million in revenue on its books. Seven months later, MicroTech had paid only $US500,000.

An auditor questioned why MicroTech owed Autonomy so much money. After that, Autonomy recorded a deal with MicroTech to create an “Advanced Technology Innovation Center” and wired MicroTech $US9.6 million to pay for the new center, the letter says.

“MicroTech subsequently wired $US9.6 million back to Autonomy to pay for outstanding MicroTech receivables,” the Air Force letter says.

In other words, the letter alleges the $US9.6 million MicroTech paid Autonomy didn’t come from a customer, but came from Autonomy itself.

Again, Lynch and his spokespeople deny wrongdoing, saying that HP doesn’t understand International Financial Reporting Standards (IFRS).

A blog post on Lynch’s website states:

The USAF letter cites allegations made against the Autonomy management team by Hewlett Packard on 20th November 2012 as the basis for this review. …We strongly reject HP’s allegations. … The few examples seen to date in support of its allegations, such as those cited in the USAF letter, show that HP appears to have had a fundamental misunderstanding of IFRS accounting practices, and we vehemently deny anything improper.

An HP spokesperson responded via email:

It is patently ridiculous to continue to claim that these very serious allegations, currently the subject of investigation by both the U.S. Department of Justice and the UK’s Serious Fraud Office, are merely the result of a ‘misunderstanding’ in the difference between US GAAP and IFRS accounting rules.

We reached out to MicroTech for comment and will update when we hear back.

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