HP's Autonomy mess a black eye for those inside the company and out

It would be easy to dismiss the latest bad Hewlett-Packard news as just another example of the company’s dysfunction and yet another indictment of the short reign of former CEO Leo Apotheker. And it certainly is that.

But the truth is that no one involved in the company’s purchase of Auton0my — inside or outside HP — comes off looking good after the company’s mammoth write-off  Tuesday and the allegation of accounting improprieties at the services company. Current CEO Meg Whitman, HP’s board, Autonomy’s executives, the accountants and deal makers all come across as somewhere on the spectrum from negligent or asleep at the wheel to incompetent or even corrupt.

HP’s acquisition of Autonomy was part of Apotheker’s bold move to re-make the company and focus on services rather than on hardware. Although the deal and Apotheker’s strategy were roundly panned — and that criticism helped lead to Apotheker’s ouster months later — HP ended up going through with the Autonomy acquisition.

Now, though, HP is claiming it was duped. Autonomy was cooking the books, HP says. Autonomy boosted its reported sales by booking long-term deals as short-term ones, according to HP.  It hid the apparent fact that it was selling computers at a loss by recording their sales as software revenue and booking the cost of making those computers as marketing expenses.

Assuming HP’s allegations are true, the folks that ran Autonomy look like they were engaged in massive fraud, ginning up the company’s financials to boost its value before a sale. That’s the angle HP is pushing, noting that it has alerted the U.S. Securities and Exchange Commission and the Serious Fraud Office in the United Kingdom, where Autonomy was based.

Note, though, that Mike Lynch, Autonomy’s former CEO, and the folks that ran the company pre-HP have denied the charges. So there’s a chance that HP is misstating what actually happened, or the folks at HP actually knew what about the accounting problems at Autonomy before the acquisition or that the accounting problems actually occurred after HP’s acquisition. Lynch’s representative tried to push those lines, noting that HP has run Autonomy for the last year and its review of Autonomy’s operations pre-acquisition was “intensive.”

We won’t know until there’s an independent investigation what really was going on at Autonomy and who at that company or at HP knew what at the time of the merger.

Regardless of the outcome, the scandal is yet another black eye for HP — and not just for its former managers.

Yes, Apotheker was the CEO who pushed the deal. Both he and Shane Robinson, the company’s former chief strategy officer who was also reportedly instrumental in the deal, are both gone.  But they weren’t the only ones at HP responsible for it.

HP’s board — of which Whitman was a part — signed off on the Autonomy deal. It was the board’s responsibility to review it and the accounting reports thoroughly; obviously they weren’t skeptical enough.

Also the Autonomy deal was finalized on Whitman’s watch. With the deal already in progress when she assumed the CEO’s chair, she might not have been able to stop it. But Autonomy has been a part of HP for about a year now, all under her leadership. With HP acknowledging as long ago as May that Autonomy was underperforming, it’s hard to believe that it took the company this long to figure just why that was so.

Another group that looks bad here — assuming there really were accounting improprieties going on — are the accountants.

According to HP, Deloitte audited Autonomy’s books and HP hired KPMG to audit Deloitte. But neither firm nor HP detected the accounting problems until now. One might wonder — with good reason — why not? Isn’t that why auditors are hired — to make sure that the numbers a company reports are accurate and true?

It’s possible that Autonomy (or HP) just did a good job of hoodwinking the auditors into trusting the numbers that were being reported. But auditors these days are supposed to do more than just check the numbers. They’re supposed to check the process by which companies come up with their numbers.

When revenue is misclassified or overstated, it’s an indication that a company has faulty or corrupt internal control processes. Internal controls are the checks and guidelines a company uses to prevent fraud. All public companies are required to have internal controls and under the Sarbanes-Oxley accounting reform law most U.S. public companies are supposed to have annual audits of their internal controls to ensure they are up to snuff.

As a UK company, Autonomy apparently wasn’t subject to Sarbanes-Oxley, but the UK has its own regulations on internal controls. And you would think that in its “intensive” due diligence examination of Autonomy prior to the acquisition, HP — or its auditors — would have scrutinized the company’s internal controls. Either they didn’t, or they didn’t do a particularly thorough job.

One other group that looks bad are the companies that advised HP and Autonomy on the deal, a group that includes Qatalyst Partners, the investment bank headed by Frank Quattrone. Again, assuming HP’s allegations are true, those companies now appear to have been involved — potentially knowingly — in the purchase or sale of damaged goods. Qatalyst in particular looks bad, since it was reportedly marketing Autonomy long before HP actually bought it.

So, sure, laugh at (or cry over) HP for yet another stumble. But there are plenty of folks outside the company to share the blame.

Troy Wolverton Troy Wolverton (256 Posts)

Troy writes the Tech Files column as the Personal Technology Columnist at the San Jose Mercury News. He also covers the digital media, mobile and video game industries and writes occasionally about Apple, chips, social networking and other aspects of technology. Previously, Troy covered Apple and the consumer electronics industry. Prior to joining the Mercury News, Troy reported on technology, business and financial issues for TheStreet.com and CNET News.com.