A news story early in 2013 revealed the importance of audit work according to standards taught in study for CPA exam completion. This saga about acquisition of British software company Autonomy by Hewlett Packard demonstrates the value delivered by quality auditing and the costs of audit failures. HP appears to have wasted most of the $11 billion spent to take over Autonomy.
Shareholders have initiated a $1 billion lawsuit against HP as well as some former and current executives plus the founder of Autonomy. Court documents in the case point out detailed errors. The alleged mistakes are related to ineffective due diligence in accordance with CPA course audit principles. In addition, HP management allegedly considered canceling the deal, but decided to proceed with the closing.
Also receiving some of the blame are investment bankers, financial advisers, and auditors. A component of this story is the suggestion that some alert whistleblowers were ignored. Subsequent auditing failed to follow the audit directive from courses for CPA study about conducting vigilant efforts to detect fraud.
Consequently, the suit claims that Autonomy founder Mike Lynch was able to exaggerate his company’s performance and receive a fortune in cash from HP. When the deception frayed about one year after the deal closed, HP wrote off an astonishing $8.8 billion. As a result, the weight of the Autonomy fraud descended upon HP shareholders. Lynch denies any financial impropriety and points out that Autonomy auditors provide unqualified opinions during his period operating the corporation.
HP may have relied upon the judgment of Autonomy auditors so much that the HP board of directors neglected to initiate is own thorough investigation. However, the shareholder lawsuit claims that Meg Whitman, who replaced Léo Apotheker as HP chief executive in 2011, was aware of questionable practices at Autonomy. At that point, former board chairman Ray Lane supposedly asked HP’s financial advisers about the possibility of backing out of the acquisition after the board had already approved the deal.
Lane was allegedly advised not to cancel the purchase because HP’s board knew about accusations of management exaggerations at Autonomy when the deal was approved. Rather than confront foreign litigation, HP executives decided to resolve the debacle after completing the purchase of Autonomy. That scheme was unraveling by May 2012 when a senior executive at Autonomy informed an HP lawyer about the accounting misdeeds. Whitman then asked PricewaterhouseCoopers to investigate. This forced a full disclosure of conditions by following CPA preparation audit criteria.
Interestingly, the lawsuit identifies three informants about the dubious accounting practices at Autonomy, who came forward before the purchase by HP was final. One is a British financial analyst. He seems to have seen beneath the surface of Autonomy’s audited statements. Another person who blew an early whistle is a former Autonomy finance executive. That individual allegedly told Autonomy’s auditor at Deloitte about improper accounting. Despite these troubling claims, HP conducted only three weeks of due diligence on Autonomy. Moreover, this verification process was less scrupulous than CPA materials prescribe. For example, Autonomy refused to provide copies of support documents from its audits.
HP finally came clean about the botched Autonomy purchase in November 2012. Management admits that is relied entirely upon audited financial statements and representations by Lynch about Autonomy’s financial condition. While these figures now appear to have been falsely manipulated, questions remain about why HP finalized a purchase without performing its own comprehensive accounting inspection.
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