HP CEO Meg Whitman explains alleged Autonomy accounting fraud

Hewlett-Packard's $8.8 billion fiscal fourth-quarter write-down, and reasons for it, shine a stunning spotlight on Meg Whitman and predecessor Léo Apotheker's lingering legacy. HP ousted Apotheker in September 2011, less than a month after he brokered the Autonomy acquisition. Today, during the company's fiscal fourth-quarter earnings conference call, chief executive Whitman had to answer for mistakes she inherited.

While expressing "we remain 100-percent committed to Autonomy and its industry-leading technology", she also acknowledges alleged fraudulent accounting that only recently came to HP's attention. Regarding the $8.8 billion, "the majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations that occurred prior to HP's acquisition of Autonomy and the associated impact on the expected financial performance of the business over the long term. The balance of the impairment charge is linked to the recent trading value of HP stock".

Whitman says "these improprieties were discovered through an internal investigation after a senior member of Autonomy's leadership team came forward following the departure of Mike Lynch on May 23. Based on this information, HP initiated an intense internal investigation into the allegations, including a third-party forensic review of Autonomy's historical financial results". Lynch was Autonomy's CEO.

In a statement given to Reuters on Lynch's behalf: "The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false. HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP's senior management has also been closely involved with running Autonomy for the past year".

"HP has contacted the SEC's enforcement division and the UK's Serious Fraud Office", Whitman emphasizes. "We have requested that both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek redress against various parties in the appropriate civil courts to recoup what we can for our shareholders".

The company spent about $10.2 billion to acquire Autonomy, with the write-down putting the investment -- or burden on shareholders, if you will -- at $16 billion.

But who should be held accountable? During today's conference call, Benjamin Reitzes, Barclays Capital analyst, asks: "Who are you holding accountable internally?"

"The CEO at the time and the head of strategy who led this deal are both gone, Léo and Shane Robison", Whitman answers. "Most of the board was here and voted for this deal, and we feel terribly about that. What I will say is the board relied on audited financials, audited by Deloitte, not brand x accounting firm but Deloitte. And by the way, during our very extensive due diligence process, we hired KPMG to audit Deloitte, and neither of them saw what we now see after someone came forward to point us in the right direction".

She adds: "I was surprised to find that due diligence and M&A reported the strategy as opposed to the Chief Financial Officer. I've never seen that before in my career, and that's a decision I made right away before I knew any of this. So I understand your point of view, and we have made a few changes in that regard. But in the end, you have to rely on audited financials and we did, and we will now carry on. And as you know, we've reported this to the SEC, as well as to the Serious Fraud Office, and we will take it from here".

But the answer doesn't satisfy Reitzes, who apparently recognizes the fallout could affect current leadership. After all, the acquisition closed on Whitman's watch. He asks: "Based on what you see right now, the organization is -- can remain stable based on this occurrence?"

"Yes, it can", she answers. "I mean, really, the two people that should have been held responsible are gone, and that's the way I see it right now. So I feel good about the sort of the stability of leadership".

HP's "internal investigation is ongoing", Whitman says. While "we are committed to seeking redress for the benefit of our shareholders" the reality: "I suspect this is a multi-year journey through the courts in both countries".

Transcript courtesy of Seeking Alpha.

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