Hewlett-Packard's Autonomy claims inconceivable, says Mike Lynch

Autonomy founder says he will not be HP's scapegoat after $5bn writedown on value of software firm

Autonomy founder Mike Lynch has attempted to turn the tables on his accusers at Hewlett-Packard, saying it is "inconceivable" that the level of false accounting claimed could have led to a $5bn (£3bn) writedown on the value of his software firm.

The world's largest PC maker bought Autonomy for $10.3bn last year in an effort to transform itself into a fast growing software company. On Tuesday it said the Cambridge-based firm was worth half of what it paid and blamed the discrepancy on "accounting improprieties" by Autonomy's management team.

"It is inconceivable how, from $100m of revenue that just changes classification, you could possibly have a writedown as big as $5bn," Lynch said.

The row coincided with a disastrous financial update showing HP's revenues down 14% year on year. It is suffering from falling demand for its PCs as consumers save for tablets and smartphones.

Lynch said: "They've had to do a very big writedown and they tried to blame it on the accounting but obviously something else is going on. People realise I'm certainly not going to be used as HP's scapegoat when it's got itself in a mess."

Lynch admitted that Autonomy did occasionally sell hardware at a loss and report it as a marketing expense. He said Autonomy would sometimes sell desktop computers alongside software.

This was the most detailed of HP's claims, that Autonomy classified revenue from hardware sales as being from software, while booking the loss as a marketing expense. Such sales were said by HP to represent 10% to 15% of Autonomy revenues estimated at $1bn last year – adding up to $100m to $150m.

A small number of deals were struck at a loss, Lynch told Reuters, if the client agreed to market Autonomy products, and in those cases the transaction would be charged as a marketing expense.

"Even if you took HP's argument, which is inaccurate … it would make no difference to the bottom line or the top line," he said. "All of those deals went to our auditors who also agreed to the treatment. It's no great secret that Autonomy sells hardware."

A spokeswoman for Lynch denied accusations of "channel stuffing", a practice which has led to companies including McAfee and Bristol Myers Squibb being fined millions of dollars by the US authorities. Channel stuffing involves booking as revenue products passed on to resellers when no income has been received or is likely to be.

HP claimed Autonomy had improperly booked revenues for products it had transferred to middlemen, known as resellers, which they had not yet sold to customers.

"There's no problem with how we do that," said Lynch. He pointed out that the accounting rules followed by Autonomy and most other British companies, known as international financial reporting standards (IFRS) were different from those commonly used in the US, generally accepted accounting principles (GAAP).

"There are very stringent rules about how we recognise revenues with resellers," he said. "They could be found in the annual report." Autonomy's annual report states that sales are only recognised "if all products subject to resale are delivered in the current period, no right of return policy exists, collection is probable and the fee is fixed and determinable".

In a third charge, made on a conference call with journalists, HP chief executive Meg Whitman said Autonomy had been inflating its revenues by converting long-term deals to host digital archives for businesses, like banks or law firms, into short term licensing deals.

A spokeswoman for Lynch said Autonomy had handed all receipts to its accountant, Deloitte, on a quarterly basis, even though it was not obliged to do so. The accountant had to approve every invoice over €100,000. "All of these deals went through Deloitte themselves," said Lynch. "Deloitte apply the test independently of us, and it is a standard test, and it is explicitly stated in the annual report and accounts."


Juliette Garside

The GuardianTramp

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