What about due dilligence? The fact that this can happen boggles my mind.
The answer I got was that for a large company, hiding things on the balance sheet is like getting a home inspection and finding out later that the house has some big problems with it. The point being is that inspections find somethings but can never find all issues.
What they meant was that if you dig deep enough you can always find out the problems, but when your going through the aquisition, you often don't have the proper access to the records you want, or the time to do the entire audit.
HP has owned autonomy for over a year and just found out this quarter. There is no way they would have had such access to autonomy's books during the due diligence phase nor is there anyway that autonomy would have let them take over a year to do their due diligence
I think we all are this morning. Unfortunetly the chatter we are hearing is that this type of accounting cover up, if true, would require help from their auditor.
Which means we may be down another accounting firm by the time this is over.
CNBC is reporting that Autonomy was booking losses on hardware sales as marketing expense, and that its arrangements with resellers amounted to kickbacks. That may reflect improper accounting and practice. But any serious understanding of how the company goes to market and wins business should locate these expenses and arrangements no matter where they reside on the income statement -- and having located them, realized their implications for the value of the business. Clearly HP missed these items, which means they didn't understand the business model. The End.
Maybe Deloitte did a poor job on Autonomy's books. But anyone spending this kind of money at these multiples on the basis of an auditor's opinion is an idiot. And it does not speak well of HP that they are trying to place responsibility for this on someone outside their organization.
If HP are prepared to pass on their information to the SEC and SFO, as well as talk about potential civil action, it would suggest they believe they have a valid case and this isn't just pomp and bluster for the benefit of shareholders.
I'm not saying the acquisition wasn't a stupid idea, or that HP's auditors couldn't have spotted these problems sooner - but if what HP claim is true then you can't hold it entirely against HP and the auditors.
HP is essentially saying "They didn't tell us X was in the marketing costs!" Well, then HP weren't asking the right questions about marketing strategy and drivers, and about relationships with customers and partners.
I don't think HP escape culpability, but for all we know someone at the auditors or HP were asking the right questions, and were being deliberately misled.
Or trying to save face.
The responsibility is, of course, HP's. And they know that, which is why they took the writedown. But the blame for crime falls on the criminals.
Possibly, but consider my analogy of buying a house.
When you do a house inspection you get a professional to do it for you. You have to trust his opinion in a lot of cases and in even more cases you understand that he can't vouch for some things.
ie wiring behind walls, mold checks on hidden surfaces, foundation cracks behind finished walls.
if you wanted to do all this on your house inspection you'd have to kick out the tenants for 3-4 weeks and tear the house down to the studs to be 100% sure there were no problems.
Now go back and consider the purchase of a company by another. If they wanted to know every detail it would take 2 years and shut down the company being aquired while they do it.
No sane company would ever agree to that so you have the situation we currently have where you negotiate what the acquiring company can see and what the break fee is if they walk away.
Sadly the diligence phase is often farmed out to an IB who has no interest in seeing the deal break.
Fraud detection is a lot more work aka forensic accounting.
Why? for making a bad business decision?
The board approved it. That's why there is a board. The finance department at HP signed off on it. The tech department at HP looked at the tech and signed off on it.
Everyone signed off on it, it didn't' work out.
http://www.businessinsider.com/meg-whitman-hp-autonomy-blame...
"Why didn't the HP board question the purchase price in the first place? That's what Benjamin Reitzes, an analyst for Barclays Capital, asked on the call. Whitman's answer: The board wasn't responsible. The two people who were responsible, in her view, are now gone: her predecessor, Léo Apotheker and HP's longtime strategy chief, Shane Robison, who retired in November 2011, shortly after the Autonomy deal went through. "
It's true that the buck stops with the CEO. It was after all, his decision to make the deal.
My point was what are you going to sue him for? He did the right thing. He made up his mind, ran it past the board for approval, ran it past finance for approval, got an outside auditor to do due diligence.
All approved. The deal went through.
It turned out to be a stupendously bad business decision.
Should twitter be able to sue the developer who made the incredibly bad design decision to use ruby on rails and architect their system as a blog rather than than a message queue?
Bad decisions happen, people loose their jobs over them. it's much harder to sue someone when they've done the due diligence and had the decision signed off by many other people.
And in the end, it was not something that was done hidden from other people, if it was a bad decision they should have stood their ground.
edit: http://news.ycombinator.com/item?id=2902749 I just stumbled upon this comment by AlexMuir, it was the most upvoted comment on the HN discussion about HP's acquisition of Autonomy
AlexMuir pretty much called it.
They are clearly part of the problem. HP's vaunted culture isn't what they think it is and that's part of the problem too. They are too big for their britches, literally, need to cut some pieces off and get smaller again before they become smaller.