ANOTHER US-UK economic conflict is brewing, following HP’s revelation that it has taken an $8.8bn (£5.5bn) write-down. It comes after the claim that it had discovered “serious accounting improprieties” at Autonomy, the British software company.
Autonomy completely denies the allegations, of course. But like Standard Chartered’s run-in with the New York regulator over Iranian sanctions, allegations will be thrown across the Atlantic for weeks to come. And the likelihood is that the case will become entangled in the complex and difficult relationship between UK and US regulators. When it comes to potential liability, therefore, the consequences could very much depend on how this relationship is reconciled.
On 18 August 2011, HP announced the purchase of Autonomy for an eye-watering $10bn. Following due diligence, the transaction was approved by the boards of both companies. Even then, eyebrows were raised at the price paid and the health of Autonomy.
HP’s chief executive Meg Whitman’s allegations accuse Autonomy of a “wilful effort to mislead”. Autonomy’s reported sales margins of 40 per cent to 45 per cent were apparently closer to 20 per cent to 28 per cent. Other allegations relate to booking sales made through resellers as revenue, and booking too early the revenue from long-term contracts. Mike Lynch, Autonomy’s founder, has issued a detailed public denial.
HP is carrying out an internal investigation into what happened. But critically, it has also referred the matter to the US Securities and Exchange Commission and Britain’s Serious Fraud Office (SFO).
In the UK, allegations of serious accounting improprieties are usually investigated as false accounting or fraud offenses. This means that the question of liability really depends on the crucial question: who knew?
Even if the required criminal mindset is missing, the Financial Reporting Council – the accounting regulatory body – might examine whether the company’s auditors and finance directors had fulfilled their duties. Additionally, the Department of Business, Innovation and Skills may consider whether directors or former directors could be disqualified under the Company Directors Disqualification Act. Similarly those who assisted HP in carrying out due diligence may find themselves under an uncomfortable spotlight – this time from the market. How could HP have failed to spot the problem not just before purchase, but for another six months afterwards?
All these issues (even an SFO investigation) pale into insignificance, however, if the US Department of Justice comes calling. Senior management at Autonomy, including former managers, might well be seeking legal advice, particularly in relation to any threat of extradition to the US. The only question that remains is whether any potential request will come before the government introduces its heralded forum bar, meaning the possibility of trial in the UK rather than the US. We will have to wait and see.
David McCluskey is a partner in business crime at Peters & Peters Solicitors.