back to article Autonomy ex-CFO Hussain guilty of fraud: He cooked the books amid $11bn HP gobble

The former chief financial officer of British software shop Autonomy was today found guilty of fraud – after helping convince HP to splash out $11bn for the upstart back in 2011. HP later had to write down $8.8bn when it realized what it had acquired was worth nowhere near the large pile of dosh it had stumped up. Sushovan …

MGJ

God their software was awful too. We bought it as an internal search engine to combine a number of data stores (intranet, shared drives, Exchange public folders etc) but it never really worked, despite the number of times the consultants came on site and set up their spiders to crawl the network, and the huge security holes we opened for them to crawl through (Exchange admin account, NT domain admin etc). Probably worked ok on anonymous websites but that wasn't what they sold us it as.

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This conviction isn't for writing poor software. Nice attempt to derail though!

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Oh yes it is. Autonomy made software, technically still does. Hussein overvalued it.

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Trollface

Value is shurely whatever the mug purchaser can be persuaded to hand over?

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Yes, their products were awful - I worked for a kind of competitor once. We observed that the products were deliberately made obscure and complex to use so as to maximise professional services revenue. No idea if those poor PS people had a better chance of getting them working.

As for the financials - "caveat emptor". So there were huge irregularities in their financials. This is why purchasers enter into due diligence investigations. So there is fault on both sides. Did HP use external auditors I wonder? (cough, no mention of the usual suspects--).

Of course, failure of due diligence is not unknown, particularly when senior execs are pressing the pedal to the metal on the deal. Ask Lloyds Bank about HBOS.

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Anonymous Coward

Autonomy made software, technically still does. Hussein overvalued it.

All software companies who have time based licence agreements make up their numbers to suit a purpose at a time, because GAAP is sufficiently flexible that there are choices that have to be made. It isn't like selling a product with a clear cost to make and sell, a clear sale date, and the only uncertainty is the usually minor warranty costs. Which means that the management of software firms flex the numbers to say what makes them the most money. Not just Autonomy, IMHO.

If I close a £10m deal to sell software with a ten year licence to use and five years contracted support, how do I show that in the accounts? GAAP rules are reasonably clear on a support agreements that it should be phased according to the work (although even then the wording of the agreement can change things), but the sale of the licence agreement is a very flexible friend - even if the revenues are staged, if the buyer becomes contractually liable at the date of the contract that can be classed as a sale and booked as revenue in the P&L - and nominally you can even do that before the contract start date, so getting the customer to sign just at the end of the reporting period gives carte blanche to flip the revenues into "last period" or "next period" as required. Unfortunately they all too often keep booking it as early as possible, and then they build up this backlog of phantom sales that are not actually backed by cash, creating a need to fudge some other numbers next quarter.

That creates an environment where directors and sales managers are used to declaring what suits them (which isn't permitted under GAAP, but is often very difficult to prove otherwise), and before long the CEO is telling the FD to book a sale on the strength of a conversation with an old school friend now at a prospective customer - I have seen this. Only under forensic accounting investigation does this sort of dodginess become clear - it is fairly easy to hide from statutory auditors. I say this having worked for multi-hundred million pound software firm that eventually went bust due to an excess of this revenue recognition fraud, and saw five directors and senior managers sent down on a range of fraud charges.

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Facepalm

@AC wrote: ...if the buyer becomes contractually liable at the date of the contract that can be classed as a sale and booked as revenue in the P&L - and nominally you can even do that before the contract start date, so getting the customer to sign just at the end of the reporting period gives carte blanche to flip the revenues into "last period" or "next period" as required.

No, you can't.

I've seen organizations play that shell game. You pre-book the revenues you expect next quarter for this quarter. Then when next quarter starts and you actually receive the cash from the customer, you have to go back and subtract the revenue from last quarter and add it to this quarter (unless you log it twice, in which case be prepared for jail). Since nobody goes back to look at last quarter, you don't get caught.

The rules of accounting, as well as the law, states you can only log money as received from the customer, when you actually receive the money from the customer. Duh.

It's a game to cover up poor cash flow and it fools no one with any decent experience. It's completely unethical, but if everyone in your group is doing it you don't get into trouble. The problem is if you keep doing it, it all piles up. It's the poor marketing schlub playing this math game that gets in trouble, and not the boss that ordered him to do it.

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Wouldn't this be a SOXX issue too?

I don't see SOXX mentioned in the article perhaps there would/should be separate charges against CxOs of Autonomy for violations. Or maybe it wouldn't apply if Autonomy was a UK company, or maybe it would apply if they were listed on a U.S. exchange(seems they went on Nasdaq in the 90s) even if they were a UK company, am not sure how the rules work obviously!

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Re: Wouldn't this be a SOXX issue too?

I suspect there several other security law violations that could have used and may used in other cases. It probably depends on what the prosecutors thought were the strongest.

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Re: Wouldn't this be a SOXX issue too?

>It probably depends on what the prosecutors thought were the strongest.

More about which required the lowest level of evidence and proof and would result in the highest penalty.

The laugh is that whilst a few ex-Autonomy directors will be relieved of their fortunes, the monies received will only go towards paying off the lawyers; HP will still have to live with the $8Bn write off; that money has gone.

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Re: Wouldn't this be a SOXX issue too?

AFAIK, what is acceptable under US accounting rules and regs is not necessarily acceptable under UK accounting rules and regs and vice versa. Or at least that was the argument (and continues to be the argument that Mike Lynch et al are using in the UK court case papers). Their reasoning was that it was acceptable under UK rules to book revenue in a certain way. The SFO investigated (or glanced over, who knows) and found no case to answer (which is why HP(E) took them on in a civil case).

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Re: Wouldn't this be a SOXX issue too?

I find it hard to believe that something that rises to the level of this type of fraud would not be illegal in the eyes of both the SFO (UK) and the SEC (US). We're not talking about tiny little differences between IFRS15 and GAAP here. Makes me very curious about what happened at the Serious Fraud Office.

Equally I find it bizarre that HPE's auditors didn't smell a rat during due diligence. Something's really not quite right there.

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Anonymous Coward

Plenty of blame...

Not wanting to let Hussain off the hook, but we should remind ourselves that even after the massive write-off, HP *still* paid more for Autonomy than anybody else thought it was worth.

Now, when will Leo face some consequences for the jobs he destroyed with his vanity and stupidity?

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Re: Plenty of blame...

HP has form, going way beyond just Apotheker's time. Never mind Palm: when HP swallowed Autonomy they had already paid ridiculous amounts for EDS in a hubristic attempt to ape IBM and Oracle over their full range of activities.

Here's a query that turns up a couple of my comments on the subject.

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in this case, both sides are right

Autonomy for putting lipstick on the pig.

HP for not noticing it was a pig.

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Anonymous Coward

Re: in this case, both sides are right

HP for not noticing it was a pig.

It noticed this only after it proposed, they exchanged vows, it kissed the bride pig and took it home.

There should be some level of caveat emptor here and there should be at least the same level of lawsuit against Autonomy accounts auditors.

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Re: in this case, both sides are right

AC - wasn't there a Benny Hill sketch where he marries a beautiful woman, gets her to the honeymoon suite and looks on lasciviously as she removes her makeup, teeth, wig, leg, etc....?

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Anonymous Coward

Re: in this case, both sides are right

there should be at least the same level of lawsuit against Autonomy accounts auditors

This. Wasn't this the whole point of auditors, discovering the burned edges on the books that have been cooked?

"Misleading auditors" is IMHO a nice get out statement for those people not actually having done their job.

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Re: in this case, both sides are right

Oy! Let's have a bit less porcophobia please!

When did you ever meet a pig with such bad taste as to apply warpaint to the lips?

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Anonymous Coward

Re: in this case, both sides are right

Wasn't this the whole point of auditors, discovering the burned edges on the books that have been cooked?

In theory yes. In practice no. It is easy to cook the books of a software house, and still get the normal audits signed off. AC because I've seen this.

Even the "due diligence" audits aren't much better - they'll verify a few contracts, do some desk analysis, charge a fat fee and deliver a vast Powerpoint deck telling you nothing. They certainly won't take the wheels off and verify everything. What they should do is track about the past three years results (including half year), and take end of period revenue as claimed and reconcile through to subsequent cash (both cash flow statement, but actual bank payments) and balance sheet for all high value contracts and a sample of smaller ones. That's a hell of a lot of dull and time consuming work that requires high calibre educated staff. Then they should examine and verify all high value long term contracts, including with the customers to see what they make of the revenue being claimed, and how solid the quality of the claim is.

This takes far too long and costs far too much for the corporate shit heads who undertake M&A. They're obsessed with doing the deal ASAP, somebody else's cash is burning a hole in their pocket, so they commission a load of slimey consultants to go on a quick but expensive box ticking exercise, wave the resultant bit of paper, and go ahead. it's a well known fact that most large company M&A destroys value, the curious thing is that all the time people who know this are busy promoting new M&A deals. it's easy money for bankers and advisors, but you have to wonder why the acquiring or merging companies assume that everybody else messes up M&A, but they themselves will miraculously make a success of it.

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Anonymous Coward

Re: in this case, both sides are right

"The Crying Game" seem appropriate for this situation.

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FAIL

The Machine

Maybe HPE can figure out a way to blame The Machine on Autonomy, too.

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Due Deligence Before or After a $11bn Takeover????????????????

"But when HP's investigators later went over Autonomy's books, they found the firm's value had been staggeringly inflated" . . . One would rationally expect that for a $11bn deal they would have gone over the books before an agreement.

If my memory serves me well immediately after HP announced the takeover Oracle mockingly claimed that Autonomy was shopped to them for $4bn only months earlier and they did not bite because it was over valued at that price. The books may have been cooked but the valuation that HP paid still defied logic.

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Re: Due Deligence Before or After a $11bn Takeover????????????????

HP's board at the time wasn't just criminally stupid but was committing criminal acts as well. I figured they would be a great case study for board maleficence.

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Unhappy

"Oracle..claimed that Autonomy was shopped to them for $4bn only months earlier "

TBH the only way I can see this happening is some truly monstrous chemically assisted egos urging each other to more and more excessive behavior.

But maybe that's just because I've watched "Kill your friends" again.

So just the monstrous egos at work then?

When you're dealing with what is basically a software house it's entire resource base is

a) The development team. b) The current and expected sales and support contracts.

It's all people or paper.

And in this case it looks like most of the people was of the toilet variety.

The question is should the auditors have spotted that fact?

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The defense was "they would have done the deal even if we hadn't cooked the books".

I'm gratified that didn't fly.

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Anonymous Coward

Given what HP paid vs its actual book value -even cooked- that statement may actually be true. Doesn't make it right what was done, but that statement is probably true.

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Anonymous Coward

Autonomy was a pile of BS...

It was exactly like paying $11bn for one of those random "AI" startups today. Very obvious to anyone technical that it was vapourware.

I doubt that this CFO did anything different to any other CFO. HP have a serious quantity of buyer's remorse.

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Extradition?

Did he get extradited to the US? Or has this occurred in his absence? Given that the SFO said he had no case to answer under UK law can’t he just stand at lands-end thumbing his nose in the general direction of the US?

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Re: Extradition?

See previous (many) extra territory judgements by US courts - althiough he may have made statements in the US?

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Re: Extradition?

I have been trying to find this out: in a Reuters report from 2016 it says that he remains in the UK but has sent a legal representative. Since charges were thrown out in the UK, and he was a UK representative of a UK company submitting UK returns, the forum bar should whack any extradition on the head as well.

But courts are weird.

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Re: Extradition?

I have no view on this judgement, but have been involved in other litigation in the US and I can tell you that as a foreign party you are at a severe disadvantage compared to the domestic party.

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Re: Extradition?

re Aqua Marina

Please be careful, my reading of it is the SFO DID NOT say he "had no case to answer" but rather that the likelihood of obtaining a successful prosecution was small. How many times have we heard something similar?*

They are not the same and do not actually prove/mean that the books were 100% accurate and not cooked at all.

The best way to show that justice has fairy prevailed is to make public the actual evidential documents that PROVE the books were cooked, that people were "bought off".

*contrast this with the number of PC agenda cases where the CPS still pursue such cases DESPITE clear evidence clearing a defendant.

I still laugh about a case mentionned here on El Reg about a case, up Cheshire way?. where the judge asked the CPS "Is this a cartoon (Tiger) we are watching?"

"Oops" say the CPS "yes it is." With little detriment whatsoever, if at all, to their continued employment and considerable remuneration at public expense.

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And yet...

Meg went around for ages crowing about how wonderful Autonomy was and what brilliant things it would bring to HP.

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But when HP's investigators later went over Autonomy's books, they found the firm's value had been staggeringly inflated, forcing HP to write off billions of dollars a year after the ill-fated acquisition.

If I was buying another company for $11 billion i'm sure as hell going to look at the books before I buy them.

Here's a tip for you HP, it's called due diligence

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HP seems to have missed another red flag

Never trust a company that names their meeting rooms after Bond villains!!

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Anonymous Coward

Re: HP seems to have missed another red flag

LOL, obviously you worked there as well, what a great read today's news was!

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SFO with egg on their faces?

So, given that a US court has found him guilty, wouldn't that tend to indicate to the SFO that perhaps there might actually be a case to answer after all?

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Anonymous Coward

Re: SFO with egg on their faces?

I think you'll find that standards of proof in regional US courtrooms are somewhat different to at the High Court in London, added to which the laws and procedural rules are different. In particular, being a "furrener" in a US court room automatically makes you guilty.

I've no doubt the bloke is guilty of something. But in the world of corporate finance, it is justifiably a world of caveat emptor. The most serious crime is that HP's board shafted their own shareholders through their reckless carelessness. Not once, not twice, but many times over.

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Re: SFO with egg on their faces?

Nope batfink it's the same reason american films always win at the Oscars

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re: in this case, both sides are right

I was inside Vignette during this time, having spent a fair number of years working with and for HP. I was truly gobsmacked at hearing what HP did. Vignette used Autonomy as the federated search engine inside their content management software, and sometimes it worked. Sometimes, it simply wouldn't and then we got to try to get 'support' out of Autonomy. After years of contract PM work, I thought I could get blood out of a stone but Autonomy 'support' was mind-numbingly crap. Hearing that HP were going to pay $11b for such a lame pile of dipshits?? I thought the world was taking the mick, but no, HP post-Fiorina was simply a management wasteland.

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Anonymous Coward

TDLR; poor due diligence and auditors with one eye on the recurring fees.

This whole sorry farrago highlights a couple of issues for me. Firstly due diligence is often either not done properly because of time and cost constraints, or is undertaken to reinforce a decision that's already been made. You'd be amazed at how cross purchasers get with the the service provider when a due diligence report shows some issues that should stop the deal- it's almost as if it's their fault for finding the problem in the first place rather than the vendor for hiding it.

Secondly the subject of risk, more specifically audit risk, is something that often gets lost in the commercial drive to get and keep big fees. Any audit should have a detailed risk assessment undertaken that highlights the riskiest areas and in a software contract/licensing business like Autonomy, the risk of material misstatement of income due to either fraud or cut off (timing) errors would be very high.

If the auditors didn't perform sufficient testing to assure themselves that turnover was i) recorded in the correct period and ii) legitimate, then the true and fair statement on the accounts could be called into question and the auditors shouldn't have signed an audit report.

The longer it goes on for, the less effect window dressing (pulling profit into an earlier period) can have, unless you're experience exponential growth. Something as straight forward as circularising the main debtors would have shown fake sales relatively easily.

Even under old UKGAAP (pre FRS 100-105), revenue recognition was pretty tightly covered and in a lot of instance was fairly prescriptively dealt with. FRS 5, appendix G, dealt with revenue recognition in a LOT of detail but larger audit firms wouldn't just have to rely on the text, they often carry out industry overviews and would know the industry standard for treatment of sale/support contracts.

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Due Diligence

HP should have done their due diligence instead of stampeding in as usual. HP have a history of over paying for things and then having to write off huge sums later. EDS is another example.

Who wouldn't look to take advantage of negligent, ego driven hubrists like Apotheker, Hurd and Whitman when they've made a living out of taking advantage out of others.

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Really?

OK so the US courts have found a UK national guilty of fraud. Unfortunately, I'm not surprised, the US have a history of finding someone foreign to blame for a US based catastrophe.

However, even if the CFO did cook the books (and I'm still not convinced) for a business that had approximately US$1bn revenue, surely you would have to cook the books to an astronomical level to justify an US$11bn adjustment and fraud of that magnitude would have stood out like a sore thumb. The type of things that HP are accusing Autonomy of mostly relate to the timing of revenue recognition not something that could generate massive differences.

This just smacks of a smokescreen to deflect the blame away from HP, their due diligence and their subsequent mismanagement (something of which they have a track record). My understanding is that HP had full access to Autonomy's books for months prior to the deal, were a party to much of the decisions in relation to the day to day running of the business and had their own auditors complete the due diligence.

Seems to me, HP paid over the odds in their haste to become a global powerhouse. Once they realised their error, they then scratched round looking for a scapegoat that wasn't HP. They decided that the seller was at fault for painting Autonomy in a good light and it was in no way their responsibility, no siree, nothing to do with them.

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Anonymous Coward

Still no idea what they did

I was EDS and be were gobbled up by HP (then HPE and now DXC) so I remember at the time the purchase of Autonomy.

To this day I still literally have no idea what that company did. It seems more a parody like in the TV show Silicon Valley than real life. It certainly didn't feel like an 11 billion dollar company anyway

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Huge fan of moronic accounting getting a kicking in court.

I'm just wondering when blighty will have the 2.8trillion sub prime defrauding banker bastards in the dock, because my kids legacy of a nation repaying that idiocy for a life time and the probable number of deaths (from a utilitarian view) are starting to rankle!

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