• Register
Return to: Home > Comments > Should takeovers come with a health warning?

Should takeovers come with a health warning?

Roger Barker, director of corporate governance and professional standards, Institute of Directors

Guest post by Roger Barker*

When it comes to whistle-blowing over alleged accounting irregularities, they don't come much bigger than this. In recent months, a massive whiff of scandal has surrounded the purchase of UK software company Autonomy by Hewlett Packard (HP) in 2011.

It's reported that the takeover was prompted by HP looking for something more exciting than its current product mix of computer hardware and printing inks. High margin software offered them a way out.

But, the $11bn sale of Autonomy in October 2011 to HP was followed a year or so later by a shock write-down relating to the transaction of an eye-watering $5bn (source: Financial Times, 18 February 2014).

According to HP, a whistleblower from Autonomy had decided to step forward and tell their new bosses about alleged financial irregularities in the newly-acquired business.

The allegations centred around Autonomy's practice of not only selling its own software but also discounted third party computer hardware to large financial institutions.

This practice has been described by HP investigators as a means by which Autonomy artificially inflated software revenues. HP thought it was buying a software company with massive software revenues - but according to HP these revenues were apparently not all they seemed.

HP has since informed both the FBI and Securities and Exchange Commission about its allegations. It is, it claims, the victim of a multi-billion-dollar scam.

To add fuel to the fire, EY, HP's auditors, recently republished Autonomy accounts, which show half the previously declared revenues and 81 per cent less profit.

Autonomy meanwhile, counter-claims that HP was well aware of the accounting practices relating to the booking of software revenues. They claim to have evidence that such practices were being discussed by HP executives long before the emergence of any whistleblower.

The losses it made on the hardware were apparently fully recognised in the result for the period, and they were accounted for as a Sales and Marketing expense in a report by Deloitte in October 2009.

Far from being a victim, Autonomy claims that HP has been the architect of its own misfortune, destroying the value created by the acquisition through overwhelming bureaucracy, internal disruption and mismanagement.

HP shareholders are far from impressed, and have sued HP for the cost of the write-down and the fact the board allegedly ignored financial irregularities before the sale went through.

So, is HP the victim here? Investigators will need to look into the allegations of accounting malpractice, disclosure failures and misrepresentation, which would amount to a massive scandal.

But there is also the question of governance- did the HP board overpay for Autonomy as shareholders claim? There was scepticism voiced by some analysts about Autonomy before the sale. So what on earth was happening during due diligence?

Was HP blinded by the opportunity in front of it? Did the prospect that Autonomy offered, including entering new and lucrative markets and acting as a catalyst for a more entrepreneurial culture, prove simply too tempting for proper checks and balances to be in place? And were decisions subject to appropriate independent scrutiny?

There are so many questions yet to be answered. Autonomy's external auditors, Deloitte, it has to be said, strenuously deny any wrongdoing.

It's hard to know at this point in the investigation if whistleblowing acted as the wake-up call to the HP board that they have claimed, alerting them to practices they say they had no prior knowledge of. But the fact that a whistle-blower was prepared to speak up might have wider ramifications for future deals, if, as this suggests, there is only limited protection that can be afforded through established accounting principles and rules.

There is no doubt how hard it can be for boards to make decisions - often based on partial information - in a complex world. The lesson, once again, has to be proceed with caution when it comes to takeovers, particularly in view of the finding of some academic studies that up to 70% may be value-destroying rather than value enhancing.

Caveat emptor.

*Dr Roger Barker is director of corporate governance and professional standards at the Institute of Directors


Top Content

    ARGA team, assemble!

    The new top team has been named that will see in root-and-branch reform at the Financial Reporting Council (FRC) as it transforms into the Audit, Reporting and Governance Authority (ARGA). Will the new duo be as dynamic as some are hoping? Robin Amlôt reports.

    read more

    FASB: a quest for simpler standards

    FASB chair Russell Golden addressed the IMA 2019 Annual Conference and Expo at the Sheraton San Diego Hotel and Marina, California, on 18 June. IMA immediate former chair-emeritus Alex Eng acted as moderator. Joe Pickard reports.

    read more

    The future of audit, and how to get there

    Two recent reports peer into the future of the audit profession. One analyses what an audit should offer, while the other looks at how the audit process will be carried out. Robin Amlôt takes a closer look at both.

    read more

    EFAA elects new president, focuses on digital future

    EFAA’s new president, Salvador Marin, outlined his key priorities for the next two years at the organisation’s 2019 annual general meeting, while outgoing president Bodo Richardt offered advice. Robin Amlôt reports.

    read more


    As the Coronavirus (COVID-19) continues to spread across the world, the International Accounting Bulletin and The Accountant will be collating all the latest news and updates from the profession on the pandemic’s impact.

    read more
Privacy Policy

We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.