Accounting fraud embarrasses auditors, bankers

A shopper looks over computers in the Best Buy store in East Palo Alto, California, U.S., on Thursday, July 18, 2011. Hewlett-Packard Co. (HPQ), the world’s largest computer maker, said it is in talks to buy Autonomy Corp. and is exploring strategic options for its personal- computer business. Photographer: David Paul Morris/Bloomberg

A shopper looks over computers in the Best Buy store in East Palo Alto, California, U.S., on Thursday, July 18, 2011. Hewlett-Packard Co. (HPQ), the world’s largest computer maker, said it is in talks to buy Autonomy Corp. and is exploring strategic options for its personal- computer business. Photographer: David Paul Morris/Bloomberg

Published Nov 22, 2012

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Nadia Damouni and Nicola Leske New York

When Hewlett Packard (HP) acquired Autonomy last year for $11.1 billion (R98.2bn), some 15 different financial, legal and accounting firms were involved in the transaction – and none raised a flag about what HP said on Tuesday was a major accounting fraud.

HP stunned Wall Street with the allegations about its British software unit and took an $8.8bn write-down, the latest in a string of reversals.

HP chief executive Meg Whitman, who was a director at the time of the deal, said the board had relied on accounting firm Deloitte for vetting Autonomy’s financials and that KPMG was subsequently hired to audit Deloitte.

HP had many other advisers as well: boutique investment bank Perella Weinberg Partners to serve as its lead adviser, along with Barclays. Banking advisers on both sides of the deal were paid $68.8 million, according to data.

Barclays pocketed the biggest banker fee of the transaction at $18.1m and Perella was paid $12m. The company’s legal advisers included Gibson, Dunn & Crutcher; Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and Skadden, Arps, Slate, Meagher & Flom, which advised the board.

On Autonomy’s side of the table were Frank Quattrone’s Qatalyst Partners, which specialises in tech deals and which picked up $11.6m.

UBS, Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America were also advising Autonomy and were paid $5.4m each. Slaughter & May and Morgan Lewis served as the company’s legal advisers.

While regulators in the US and the UK, as well as the FBI, were likely to spend months if not years investigating what happened, legal experts said on Tuesday that it was not clear if any of the advisers would ultimately be held liable.

“The most logical deep pocket would be the acquired firm’s auditors, who should have allegedly caught these defalcations,” Duke University law school professor James Cox said. Since both auditors missed the problems and it appeared to have taken HP a while to catch it after it took over Autonomy, the auditors may have a strong defence.

“You can have a perfectly sound audit and still have fraud exist,” he said. A Deloitte UK spokesman said the company could not comment and would co-operate with investigations.

The law firms and the bankers would likely argue that they were not hired to review the bookkeeping and had relied on the opinion of the auditors, experts said.

Multiple sources with knowledge of the HP-Autonomy transaction added that the big-name banks on Autonomy’s side were brought in days before the final agreement was struck.

These sources said the banks were brought on as favours for their long relationships with the companies, in a little-scrutinised Wall Street practice of crediting – and paying – investment banks that have little do with the deal.

Plaintiffs lawyers said they were taking calls from investors about HP on Tuesday. Darren Robbins, a San Diego-based plaintiff lawyer who represents shareholders, said the tech icon appeared to have spent billions on a shoddy company without undertaking the proper due diligence, and thus misrepresented its finances to investors.

But plaintiff lawyers might have difficulty bringing so-called derivative lawsuits against professional services firms, said Brian Quinn, a mergers and acquisitions professor at Boston College Law School.

In those cases, plaintiff lawyers could sue third parties, such as auditors, on behalf of HP – but they had to convince a judge that HP’s board was unfit to pursue those claims itself. In this situation, though, HP’s board disclosed the alleged fraud, Quinn said. Even if the bankers and lawyers escape any legal problems, they could suffer a reputational hit. – Reuters

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