Hewlett-Packard's Autonomy Regrets

Hewlett-Packard's auditor took a look at Autonomy, a U.K. software maker it bought for $11 billion. Things turned out to be worse than expected.

An age-old argument for making public companies switch audit firms every so often is that it brings fresh eyes to their books, increases the chances of spotting problems and keeps incumbent auditors on their toes. The big accounting firms' longstanding counter-argument is that there is no proof such a policy would help.

"In our view, mandatory firm rotation is not an effective way to maintain or enhance auditor independence, and it has not been proven to enhance audit quality," the Big Four auditor Ernst & Young wrote in a policy paper last year.

Yet a fresh look seemed to have had some effect when Ernst & Young recently checked the numbers that Autonomy Corp. reported before its 2011 acquisition by Hewlett-Packard Co. This week Hewlett-Packard filed restated results for Autonomy with U.K. regulators and cut 2010 earnings at the U.K. software maker's largest unit by 81 percent to 19.6 million pounds ($32 million). It said most of the reduction was due to accounting errors.

Autonomy's former auditor, Deloitte & Touche, has consistently denied that there was anything wrong with Autonomy's numbers. So have former Autonomy executives, including the company's co-founder, Mike Lynch. But Deloitte isn't Autonomy's auditor anymore. Now it's Ernst & Young, which is Hewlett-Packard's longtime auditor. And lo and behold, Autonomy's numbers just got restated. Now they look a lot worse.

Score a win for the fresh-eyes theory? Not exactly. It's more complicated than that. The question of whether Autonomy burnished its numbers may be settled as far as Hewlett-Packard is concerned. But there's reason to be skeptical of the restated numbers, too.

Ever since Hewlett-Packard wrote down $8.8 billion of Autonomy's $11 billion purchase price in 2012, it has sought to blame most of the loss on accounting improprieties. This has the convenient effect of shifting attention away from the fact that it grossly overpaid and did an awful job of due diligence. So the more irregularities it can dredge up, the more Hewlett-Packard can say it was blameless.

Autonomy had a reputation for aggressive accounting before Hewlett-Packard bought it. The sleuths at the research firm CFRA in New York wrote 14 reports from 2001 through 2010 raising doubts about Autonomy's accounting and disclosure practices. In other words, Hewlett-Packard's guard should have been up.

Plus, Ernst & Young stopped short of rendering a formal opinion on the restated numbers. In its Jan. 31 report, the firm said it was hired to conduct an audit but was "not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion." In effect, Ernst & Young's report amounted to a lengthy disclaimer. "If additional information and evidence had been available to the directors, including information that might be identified from the ongoing investigations, further adjustments might have been required," Ernst & Young said. Maybe the numbers would have looked better. Who knows?

Bottom line: Hewlett-Packard's restatement of Autonomy's financial results doesn't resolve much. But one point isn't in doubt. This was an acquisition that Hewlett-Packard regrets.

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