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HP claims fraud prompted $5 billion overpayment for company

Hewlett-Packard CEO Meg Whitman says the accounting moves made by Autonomy were designed to bring an acquisition.

Getty Images (2010)

Hewlett-Packard CEO Meg Whitman says the accounting moves made by Autonomy were designed to bring an acquisition.

NEW YORK — Hewlett-Packard Co. said Tuesday that it's the victim of a multibillion-dollar fraud at the hands of a British company it bought last year that lied about its finances.

HP chief executive Meg Whitman said executives at Autonomy Corp. "willfully" boosted the company's figures through various accounting tricks, which persuaded HP to pay $9.7 billion for the company in October 2011.

Autonomy's former CEO, Mike Lynch, said HP's allegations are false.

HP is taking an $8.8 billion charge to align Autonomy's purchase price with what HP now says is its real value. More than $5 billion of that charge is due to false accounting, HP said.

The revelation is another blow for HP, which is struggling to reinvent itself as PC and printer sales shrink. HP's stock dipped $1.59, or 12 percent, to close at $11.71 in Tuesday's trading.

Among other things, Autonomy makes search engines that help companies find vital information stored across computer networks. Acquiring it was part of an attempt by HP to strengthen its portfolio of high-value products and services for corporations and government agencies. The deal was approved by Whitman's predecessor, Leo Apotheker, but closed three weeks into Whitman's tenure as chief executive.

Among the tricks used at Autonomy, Whitman said: The company had been booking the sale of computers as software revenue and claiming the cost of making the machines as a marketing expense. Revenue from long-term contracts was booked up front, instead of over time.

The allegations are serious, according to accounting experts.

"According to GAAP (generally accepted accounting principles), the overstatement of revenue under any tax code is illegal," said Mark Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve.

As a result of its alleged accounting practices, Autonomy appeared to be more profitable than it was and seemed to be growing its core software business faster than was actually the case. The moves were apparently designed to groom the company for an acquisition, Whitman said.

HP's net loss for the fiscal fourth quarter, which ended Oct. 31, amounted to $6.85 billion, compared with net income of $239 million in the same period last year.

HP claims fraud prompted $5 billion overpayment for company 11/20/12 [Last modified: Tuesday, November 20, 2012 8:26pm]
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