Autonomy’s Shade Accounting Practices

Fortune has a great guest post on the accounting shenanigans that U.K.-based Autonomy took in order to meet or beat quarterly earnings.

The History

HP purchased Autonomy for $11.1 B at a substantial premium to its trading price. Soon after, HP took a $8.8 B impairment charge against the acquisition. I recall this being start of end for Leo Apotheker’s tenure as CEO of HP, especially given the strong decent of HP’s CFO, Cathy Lesjak.

The Scam

Channel stuffing or potentially parking for $200 million in revenue through VARs. According to Fortune, Autonomy generated roughly $1 B in revenue for 2010 that contributed as much as 15% in some periods and essential to meeting expectations.
“Just five resellers, in 30 transactions, provided services to Autonomy that couldn’t be called legitimate … When Autonomy was negotiating a sale to an end user, but couldn’t close the sale by quarter’s end, Egan would approach the resellers on or near the last day of the quarter, saying the deal was nearly done. Egan coaxed the resellers to buy Autonomy software by paying them hefty commissions. The resellers could then sell the software to a specified end user — but Autonomy maintained control of the deals and handled negotiations with the end user without the resellers’ aid. There’s no way these transactions could be revenue.”
Backdating deals over a two year period:
“… after a quarter’s close, Autonomy’s most senior finance executive directed Egan to procure backdated purchase orders from resellers; once, the executive obtained the dirty documentation personally. This resulted in revenue “pulled” from a later quarter into the one just closed “

Roundtripping payments:

“Autonomy needed to get cash to the resellers so they could pay Autonomy for the sham sales, creating a paper trail for the auditors demonstrating payments on the sales — a necessary optic, to avoid arousing their suspicions. The illusion was created with round-trip reseller transactions. Autonomy purchased various surplus products from the resellers, with nearly simultaneous payment by the reseller back to Autonomy on debt owed to them. The round-trip transactions were improvised by Autonomy’s senior-most finance executive, and they amounted to at least $45 million of phony paybacks to Autonomy.”

I can only empathize with the auditors as the 30 shady transactions were done over two and half years. Based on the number of deals Autonomy signed over that period, I could see how uncovering these improper dealings would be difficult.

So far the former CFO has been indicted for alleged fraud.