“Either nobody in this deal understood the
Company’s business, or someone was committing a fraud.”

— Big Firm audit manager’s
file note

Such language doubtless
lurks in the working papers of the Big Four accounting firms, concerning this
Thanksgiving’s biggest corporate turkey – HP’s announcement on November 20 of the whopping write-off of
 $ 8.8 billion of the $ 11.1
billion paid a year earlier to acquire the UK’s FTSE 100 Autonomy.

How the
blame-mongering cost of this fiasco will be allocated will depend, since each
member of the large-firm tetrapoly touched the deal – Deloitte as Autonomy’s independent
auditor, E&Y in the same role for HP, KPMG as part of HP’s huge buyer-side
due diligence team, and finally PwC, brought in to pick over the forensic
wreckage.

The quoted memo
itself goes back a generation, to an investigation into sketchy high-tech revenue
accounting – where it figured prominently in the investor litigation and the
company’s SEC consent decree, an exhibit to the hazards of recording ideas that
were both prescient and dangerous.  
  

That’s context for these
thoughts responding to my investment banker friend and regular reader, “waiting
for commentary on the Hewlett-Packard news and how it will affect Deloitte.”

Happily for the
global supply of bandwidth, this story broke in a holiday week, absorbing in
turkey, shopping and football the perfervid reactions of the most strident
critics and their demonizing of the audit franchise as systemically venal and
corrupt (e.g., here and here).

It is pointless now
– time enough as the process evolves – to judge the predictable protestations of virtue of ex-CEO Mike Lynch, or Deloitte’s statement that it “categorically denies that it had any knowledge of any
accounting misrepresentations….”

The Autonomy claims
involve aggressions as old as IBM’s practices under the Watsons in the 1950’s –
long stale and banal, and at best only interesting as an undergraduate
classroom exercise in the endlessly elastic opportunities for revenue
manipulation.

HP’s allegations do
not, so far at least, involve such classics as the empty boxes at Miniscribe (1989)
or Crazy Eddie (1987), nor yet the bogus contracts of Lernhout & Hauspie
(2000) or Satyam (2009), but only the dreary familiarity of channel-stuffing
and phantom contract dates – activities perpetually inviting to companies creatively
striving for sweetened earnings, and elusively beyond the persistent efforts of standard-setters, regulators or law
enforcement. 

More to the point,
given the long-running criticism of Autonomy’s reporting by hedge funds and
short sellers, is that it defies acceptable practice for HP CEO Meg Whitman to
attempt the lay-off, that “the board relied on audited financials – audited by
Deloitte – not Brand X accounting firm but Deloitte.”

Sorry, Meg. Not for
a generation has an effective due diligence team done any more with a standard
audit report than throw it onto the compost heap at the back of the document
repository.

The HP team, said to comprise three hundred people from KPMG, bankers Perella
Weinberg and Barclays and a quintet of law firms, surely had ample experience
to sniff out any issues deemed significant. Why it did not will abide further finger-pointing.

But collective
memories should not have been so short as to miss the red alert flag that the
Autonomy deal was being flogged by Qatalyst Partners in the person of Frank
Quattrone.

Whose earlier heady
days in Silicon Valley had ended with one hung jury, a conviction reversed on
appeal and a deferred prosecution agreement. So to say as did Reuters that
Quattrone “specializes in tech deals” is like saying that Typhoid Mary was just
going about innocently looking for work.  

Surer proof that HP
will fail to spin its Autonomy debacle as an Enron-scale accounting fraud, is
its assessment by Lynn Turner, who in 1998 was levitated to the post of Chief
Accountant at the SEC from his position in a since-disappeared high tech
company, after two decades at Coopers & Lybrand where he had emerged as
national leader of its High Technology Practice.

Turner – whose
background would presumably recognize dubious practices in the sector –-
resisted the chance to pile on his erstwhile large-firm brethren —  for whom he forsook any affection upon
his extraction from their ranks, his animosity more typically achieving the
zeal of the mad monk in The DaVinci
Code. Asking how the Autonomy policies “translate into a $ 5 billion
write-off?” he demurred, that “the big issue isn’t the fraud they’re talking
about. The big issue is that HP has made acquisitions that have turned out to
be a disaster.”    

And so to my
friend’s question, who might ultimately be liable to whom? The news is unhappy
for HP’s long-suffering shareholders, whose claims — either as a class
(immediately launched) or on behalf of the company – under either British or
American jurisprudence will offer little recourse, against HP or its
management, Autonomy’s sellers or Deloitte.

Direct HP litigation
against Deloitte would seem unlikely, given their existing ten-year consulting relationship
as global alliance partners. Nor could Meg Whitman relish hostile courtroom
scrutiny of the acquisition decision of her predecessor, Leo Apotheker, given –
on her watch — the year of pre-disclosure operating experience HP had with
Autonomy, its string of prior write-offs including the $ 9.2 billion charge related
to EDS, and the skeptics’ suspicion that HP’s write-off is a “big bath” overstatement of Autonomy’s
illness to the forward benefit of HP’s balance sheet.   

If the impact on
Deloitte and the other gate-keepers is likely “not much at all,” it is also
likely not zero — depending on where the “smoking gun” memos of the quoted
variety might reside and be discovered – since a multi-billion dollar claim is
beyond the Big Four firms’ financial capacity or risk tolerance to take to
trial (here) – however enthusiastic their press-office protestations of
innocence and scorched-earth defenses. 

What this latest dreary
escapade does portend is several years of uncontrolled legal and litigation
costs, and a flurry of inconclusive regulatory and oversight investigations –
the end results of which will be inconsequential.

And finally, a
wager is offered here, that Meg Whitman will not survive in place at HP to see
it through.

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