Dive into the Autonomy Earnings Management Case
Titling
Autonomy
Prepared and
Presented
By Hadeel Nassar (June-2017)
Real Life EM
Crime
(Fully Referenced)
This show is based on SEC Order:
USA SECURITIES AND EXCHANGE COMMISSION (SEC)
•
SECURITIES ACT OF 1933
Release No. 10256 / November 15, 2016
•
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 3823 / November 15, 2016
•
ADMINISTRATIVE PROCEEDING
File No. 3-17678
Next
introduction
is According to SEC
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 3823 / November 15, 2016
Introduction
•
From the first quarter of 2009 through the second quarter of 2011, Autonomy’s
UK-based senior-most executives orchestrated a scheme to inflate Autonomy’s
revenues through more than 30 transactions totaling nearly $200 million with five
U.S.-based companies that purported to act as resellers of Autonomy software to
end users.
•
Autonomy executives repeatedly directed HP’s due diligence team to rely on these
false filings in connection with the acquisition.
Show Super Star-1
Wikipedia
Autonomy CEO
Michael Richard Lynch
•
In 1996 Lynch
co-founded Autonomy Corporation
. and he served Autonomy as CEO.
During this time Autonomy acquired Dremedia, Virage ($13m), Verity ($500m), Zantaz
($375m) and Interwoven ($606m).
•
In October 2011 Autonomy was sold to Hewlett-Packard for $11 billion.
•
In May 2012, HP fired Mike Lynch!
Show Super Star-2
https://www.bloomberg.com/news/articles/2017-01-12/ex-autonomy-cfo-pleads-not-guilty-in-hp-accounting-fraud-case
Autonomy CFO
Sushovan Hussain
Former chief financial officer pleaded not guilty to charges he
schemed to inflate the price of his company’s $11 billion takeover
by Hewlett-Packard Co. as the U.S. continues its investigation.
Show Super Star-3
According to the SEC Order as the Respondent
Autonomy Hp CEO
Christopher Egan
•
Age 48, is a resident of San Francisco, California.
•
Joined Autonomy in 2001 and served as Head of Sales and CEO of Autonomy’s U.S. subsidiary, Autonomy, Inc.
•
Sales through Autonomy Inc., which Egan supervised, comprised over 70% of Autonomy’s total revenues.
•
Left the company in November 2012.
Show Super Star-4
Wikipedia
Hp CEO Léo Apotheker
Born September 18, 1953, in Aachen is a German business executive. He served
briefly as the chief executive officer of Hewlett-Packard from November 2010 until his
firing in September 2011.
He also served as co-chief executive officer of SAP from April 2008 until he resigned in
February 2010 following a decision by that company to not renew his contract!
Show Super Star-5
Wikipedia
Margaret Cushing "Meg" Whitman
Born August 4, 1956 is an American business executive and
political activist and donor. Whitman is currently the President
and Chief Executive Officer of Hewlett Packard Enterprise, as
well as the Chairwoman of HP Inc.
Autonomy’s Fraud
1.
The primary devices used in the scheme included the acceleration of revenue through so-called
value-added resellers, Autonomy was using the resellers as an artificial means to accelerate
revenue, as Egan directly communicated to the resellers to not interfere with Autonomy’s selling
efforts with the end users.
2.
backdated purchase orders,
3.
and round trip transactions. During the relevant period, Autonomy engaged in at least $45 million
of “fixes”.
Actions taken by Christopher Egan, the Chief Executive Officer of Autonomy’s U.S.-based subsidiary,
contributed to the success of the scheme
.
Which specific accounts and how have
they been managed?
(Sales and Accounts Receivable)
O
t
h
e
r
R
e
l
e
v
a
n
t
E
n
t
i
t
i
e
s
Hewlett-Packard Company
was a technology company headquartered in Palo Alto, California. From at least 2009 to
October 2011, HP manufactured and sold computer hardware, including laptops, servers, and printers, as well as software
and services supporting these products. November 2015, HP split into two companies, HP Inc. and Hewlett Packard
Enterprise. Both companies trade on the New York Stock Exchange under the tickers “HPQ” and “HPE,” respectively.
HP Autonomy
, formerly Autonomy Corporation plc, is a software company dually headquartered in Cambridge, England
and San Francisco, California. The company formerly traded on the London Stock Exchange until being acquired by HP.
From at least 2009 to October 2011, Autonomy’s financial statements were prepared in accordance with International
Financial Reporting Standards and were audited by Deloitte LLP in England. Following the split of HP, Autonomy’s legacy
products and operations were largely transferred to Hewlett Packard Enterprise.
HP acquired Autonomy
•
Just one year later, in November 2012, HP announced that it was
recording an $8.8 billion impairment charge, claiming that a
majority of the charge was due to accounting improprieties,
misrepresentation and disclosure failures at Autonomy.
•
HP’s stock declined by 12% on the day of the announcement, and
the company suffered a market capitalization loss of $78 billion.
Now we just answered how the earnings
Now we just answered how the earnings
management was discovered? (Hp as Investors)
management was discovered? (Hp as Investors)
Egan Role
Egan, who was employed at Autonomy from 2001 to November 2012. At the explicit direction
of Autonomy’s senior-most finance executive:
1.
He placed sales to particular resellers that allowed Autonomy to prematurely recognize
millions of dollars of revenue in an effort to meet market expectations.
2.
He backdated paperwork for at least four transactions with various resellers that
allowed Autonomy to falsely recognize revenue after the quarter had already ended.
Although Egan is not an accountant, and had no responsibility for preparing Autonomy’s
financial statements, by virtue of his failure to exercise reasonable care, Egan violated Section
17(a)(2) and 17(a)(3) of the Securities Act of 1933.
What was the motivation for earning management? (meeting
What was the motivation for earning management? (meeting
analyst forecast, executive compensation and increasing
analyst forecast, executive compensation and increasing
business value for external buyout?
business value for external buyout?
Hp Role
HP has contacted the enforcement division of the
Securities and Exchange Commission and Britain's
Serious Fraud Office, requesting that both agencies open
criminal and civil investigations into the matter. Whitman
added that the company would try to "recoup what we
can" for shareholders through lawsuits.
IFRS Violation
Autonomy was required to meet the following
criteria in order to recognize revenue from the
sale of goods:
1.
Transfer to the buyer the significant risks
and rewards and ownership of the goods;
2.
Retained neither continuing managerial
involvement to the degree normally
associated with ownership nor effective
control over the goods sold;
3.
Measure reliably the amount of revenue;
The transactions violated several revenue
recognition criteria under IFRS:
1.
Autonomy never truly passed the risks and
rewards of ownership to the resellers, nor was it
probable that the economic benefits would flow to
Autonomy, as payment was contingent upon sell-
through or via a mechanism to get funds to the
reseller to pay Autonomy.
2.
Autonomy’s ongoing efforts to sell to end users
even after the software had been sold to resellers
constituted continuing managerial involvement.
Financial Due Diligence Process
On August 18, 2011, after the conclusion of a financial due diligence process
based on Autonomy’s published financial statements, HP announced its
intention to acquire Autonomy for $11.1 billion, a 64% premium over
Autonomy’s stock price at the time. In its Form 8-K announcing the
acquisition, HP emphasized the strong financial results that based on its due
diligence process, HP believed, Autonomy had achieved to date, stating,
“Autonomy has a consistent track record of double-digit revenue growth,
with 87% gross margins and 43% operating margins in calendar year 2010.”
Insider Trading
In connection with the acquisition, which closed on
October 3, 2011, the company automatically liquidated
the stock options that Egan received as part of his
compensation at Autonomy. Just over $800,000 of the
money Egan received is tied to his role on Autonomy’s
reseller transactions.
SEC Order
Respondent shall, within thirty (30) days of the entry of this Order,
pay disgorgement of $800,669 and prejudgment interest of $122,722
to the Securities and Exchange Commission for transfer to the
general fund of the United States Treasury, subject to Securities
Exchange Act of 1934 Section 21F(g)(3). If timely payment is not
made, additional interest shall accrue pursuant to SEC Rule of
Practice 600.
Autonomy External Audit
As published on Aug 25, 2014 by
http://www.wochit.com
A lawyer for Hewlett-Packard said in court on Monday
the U.S.
company plans to sue the British unit of Deloitte over its role in
auditing Autonomy Plc
, the software company HP acquired but later
accused of inflating financial figures. HP had previously disclosed its
intention to pursue claims against Autonomy executives, including
former chief executive Michael Lynch, in connection with the sale.
Autonomy Internal Audit
Annual Report and Accounts For the year ended 31 December 2009
https://www.companyreporting.com/sites/default/files/accounts/10.03-autonomy-2009.pdf
Internal Audit
As the company has grown during 2009 the Board has discussed matters relating to internal control
and the present need to establish an internal audit function. In 2009 new senior managers were
hired responsible for internal reviews. The company has in the past and continues to maintain
extensive internal reporting functions and internal controls and significant executive director
involvement in all aspects of the company’s business affairs. No material breaches of internal
controls were identified during 2009
Governance (whistleblower)
•
L
e
s
s
o
n
L
e
a
r
n
e
d
a
n
d
C
o
n
c
l
u
s
i
o
n
N
e
v
e
r
i
n
v
e
s
t
i
n
a
c
o
m
p
a
n
y
w
i
t
h
t
o
o
m
a
n
y
n
o
t
o
r
i
o
u
s
s
t
o
r
i
e
s
.
I
n
q
u
i
r
e
b
e
f
o
r
e
y
o
u
h
i
r
e
.
Till now no Harakiri!!!
The case is still under investigation
Unveil the intricate web of deceit in the Autonomy earnings management scandal involving inflated revenues, orchestrated schemes, and high-profile executives. Discover how the SEC uncovered the fraudulent practices leading to legal actions against key figures like CEO Michael Lynch and CFO Sushovan Hussain.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Welcome to the Show of Earnings Management Case Show
Titling Autonomy Prepared and Presented By Hadeel Nassar (June-2017)
Real Life EM Crime (Fully Referenced) This show is based on SEC Order: USA SECURITIES AND EXCHANGE COMMISSION (SEC) SECURITIES ACT OF 1933 Release No. 10256 / November 15, 2016 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 3823 / November 15, 2016 ADMINISTRATIVE PROCEEDING File No. 3-17678
Next introduction is According to SEC ACCOUNTING AND AUDITING ENFORCEMENT Release No. 3823 / November 15, 2016
Introduction From the first quarter of 2009 through the second quarter of 2011, Autonomy s UK-based senior-most executives orchestrated a scheme to inflate Autonomy s revenues through more than 30 transactions totaling nearly $200 million with five U.S.-based companies that purported to act as resellers of Autonomy software to end users. Autonomy executives repeatedly directed HP s due diligence team to rely on these false filings in connection with the acquisition.
Show Super Star-1 Wikipedia Autonomy CEO Michael Richard Lynch In 1996 Lynch co-founded Autonomy Corporation. and he served Autonomy as CEO. During this time Autonomy acquired Dremedia, Virage ($13m), Verity ($500m), Zantaz ($375m) and Interwoven ($606m). In October 2011 Autonomy was sold to Hewlett-Packard for $11 billion. In May 2012, HP fired Mike Lynch!
Show Super Star-2 https://www.bloomberg.com/news/articles/2017-01-12/ex-autonomy-cfo-pleads-not-guilty-in-hp-accounting-fraud-case Autonomy CFO Sushovan Hussain Former chief financial officer pleaded not guilty to charges he schemed to inflate the price of his company s $11 billion takeover by Hewlett-Packard Co. as the U.S. continues its investigation.
Show Super Star-3 According to the SEC Order as the Respondent Autonomy Hp CEO Christopher Egan Age 48, is a resident of San Francisco, California. Joined Autonomy in 2001 and served as Head of Sales and CEO of Autonomy s U.S. subsidiary, Autonomy, Inc. Sales through Autonomy Inc., which Egan supervised, comprised over 70% of Autonomy s total revenues. Left the company in November 2012.
Show Super Star-4 Wikipedia Hp CEO L o Apotheker Born September 18, 1953, in Aachen is a German business executive. He served briefly as the chief executive officer of Hewlett-Packard from November 2010 until his firing in September 2011. He also served as co-chief executive officer of SAP from April 2008 until he resigned in February 2010 following a decision by that company to not renew his contract!
Show Super Star-5 Wikipedia Margaret Cushing "Meg" Whitman Born August 4, 1956 is an American business executive and political activist and donor. Whitman is currently the President and Chief Executive Officer of Hewlett Packard Enterprise, as well as the Chairwoman of HP Inc.
Autonomys Fraud 1. The primary devices used in the scheme included the acceleration of revenue through so-called value-added resellers, Autonomy was using the resellers as an artificial means to accelerate revenue, as Egan directly communicated to the resellers to not interfere with Autonomy s selling efforts with the end users. Which specific accounts and how have they been managed? (Sales and Accounts Receivable) 2. backdated purchase orders, 3. and round trip transactions. During the relevant period, Autonomy engaged in at least $45 million of fixes . Actions taken by Christopher Egan, the Chief Executive Officer of Autonomy s U.S.-based subsidiary, contributed to the success of the scheme.
Other Relevant Entities Other Relevant Entities Hewlett-Packard Company was a technology company headquartered in Palo Alto, California. From at least 2009 to October 2011, HP manufactured and sold computer hardware, including laptops, servers, and printers, as well as software and services supporting these products. November 2015, HP split into two companies, HP Inc. and Hewlett Packard Enterprise. Both companies trade on the New York Stock Exchange under the tickers HPQ and HPE, respectively. HP Autonomy, formerly Autonomy Corporation plc, is a software company dually headquartered in Cambridge, England and San Francisco, California. The company formerly traded on the London Stock Exchange until being acquired by HP. From at least 2009 to October 2011, Autonomy s financial statements were prepared in accordance with International Financial Reporting Standards and were audited by Deloitte LLP in England. Following the split of HP, Autonomy s legacy products and operations were largely transferred to Hewlett Packard Enterprise.
HP acquired Autonomy Just one year later, in November 2012, HP announced that it was recording an $8.8 billion impairment charge, claiming that a majority of the charge was due to accounting improprieties, misrepresentation and disclosure failures at Autonomy. HP s stock declined by 12% on the day of the announcement, and the company suffered a market capitalization loss of $78 billion. Now we just answered how the earnings management was discovered? (Hp as Investors)
Egan Role Egan, who was employed at Autonomy from 2001 to November 2012. At the explicit direction of Autonomy s senior-most finance executive: 1. He placed sales to particular resellers that allowed Autonomy to prematurely recognize millions of dollars of revenue in an effort to meet market expectations. What was the motivation for earning management? (meeting analyst forecast, executive compensation and increasing business value for external buyout? 2. He backdated paperwork for at least four transactions with various resellers that allowed Autonomy to falsely recognize revenue after the quarter had already ended. Although Egan is not an accountant, and had no responsibility for preparing Autonomy s financial statements, by virtue of his failure to exercise reasonable care, Egan violated Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933.
Hp Role HP has contacted the enforcement division of the Securities and Exchange Commission and Britain's Serious Fraud Office, requesting that both agencies open criminal and civil investigations into the matter. Whitman added that the company would try to "recoup what we can" for shareholders through lawsuits.
IFRS Violation Autonomy was required to meet the following criteria in order to recognize revenue from the sale of goods: The transactions violated several revenue recognition criteria under IFRS: 1. Autonomy never truly passed the risks and rewards of ownership to the resellers, nor was it probable that the economic benefits would flow to Autonomy, as payment was contingent upon sell- through or via a mechanism to get funds to the reseller to pay Autonomy. 1. Transfer to the buyer the significant risks and rewards and ownership of the goods; 2. Retained neither continuing managerial involvement to the degree normally associated with ownership nor effective control over the goods sold; 2. Autonomy s ongoing efforts to sell to end users even after the software had been sold to resellers constituted continuing managerial involvement. 3. Measure reliably the amount of revenue;
Financial Due Diligence Process On August 18, 2011, after the conclusion of a financial due diligence process based on Autonomy s published financial statements, HP announced its intention to acquire Autonomy for $11.1 billion, a 64% premium over Autonomy s stock price at the time. In its Form 8-K announcing the acquisition, HP emphasized the strong financial results that based on its due diligence process, HP believed, Autonomy had achieved to date, stating, Autonomy has a consistent track record of double-digit revenue growth, with 87% gross margins and 43% operating margins in calendar year 2010.
Insider Trading In connection with the acquisition, which closed on October 3, 2011, the company automatically liquidated the stock options that Egan received as part of his compensation at Autonomy. Just over $800,000 of the money Egan received is tied to his role on Autonomy s reseller transactions.
SEC Order Respondent shall, within thirty (30) days of the entry of this Order, pay disgorgement of $800,669 and prejudgment interest of $122,722 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury, subject to Securities Exchange Act of 1934 Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600.
Autonomy External Audit As published on Aug 25, 2014 by http://www.wochit.com A lawyer for Hewlett-Packard said in court on Monday the U.S. company plans to sue the British unit of Deloitte over its role in auditing Autonomy Plc, the software company HP acquired but later accused of inflating financial figures. HP had previously disclosed its intention to pursue claims against Autonomy executives, including former chief executive Michael Lynch, in connection with the sale.
Autonomy Internal Audit Annual Report and Accounts For the year ended 31 December 2009 https://www.companyreporting.com/sites/default/files/accounts/10.03-autonomy-2009.pdf Internal Audit As the company has grown during 2009 the Board has discussed matters relating to internal control and the present need to establish an internal audit function. In 2009 new senior managers were hired responsible for internal reviews. The company has in the past and continues to maintain extensive internal reporting functions and internal controls and significant executive director involvement in all aspects of the company s business affairs. No material breaches of internal controls were identified during 2009
Lesson Learned and Conclusion Lesson Learned and Conclusion Never invest in a company with too many notorious stories. Inquire before you hire.
Till now no Harakiri!!! The case is still under investigation
