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Mike Lynch Would Like HP to Show Their Work

Last week, when HP announced that $5 billion of its $8.8 billion write-down was due to "serious accounting improprieties, misrepresentation and disclosure failures" at Autonomy, a lot of people were asking questions. How do the numbers work? Is HP taking a bath? Who's this Brand X accounting firm that Meg Whitman doesn't think too highly of?

Almost immediately, Autonomy founder and former-CEO Mike Lynch was talking to every reporter within Skyping distance, refuting the allegations and demanding that HP start talking sense. HP has stuck to their guns through flaks and lawyers, so Lynch has upped the stakes by challenging the company to the corporate equivalent to a duel in the public square – he wrote the Board of Directors a letter demanding answers to questions (in full on the next page) and gave it to the press. 

And you can't help but sense that Lynch was a little hurt that HP decided to depants him and the rest of Autonomy's management in public, writing, "It was shocking that HP put non-specific but highly damaging allegations into the public domain without prior notification or contact with me, as former CEO of Autonomy."

He then gets down to business, doubling down on his denial: "I utterly reject all allegations of impropriety."

He then plays the auditor card, "Autonomy’s accounts were overseen by independent auditors Deloitte LLC, confirmed the application of all appropriate procedures including those dictated by the International Financial Reporting Standards used in the UK." (Deloitte probably appreciates the vote of confidence.)

But because HP has decided to make a spectacle of this whole thing, the true purpose of Lynch's letter is to ask a few questions of HP's Board, you know, for the record, so everyone can get to the bottom of this thing.

And really, just to keep things simple, he'd like them to show their work:

Many observers are stunned by HP’s claim that these allegations account for a $5 billion write down and fail to understand how HP reaches that number. Please publish the calculations used to determine the $5 billion impairment charge.  Please provide a breakdown of the relative contribution for revenue, cash flow, profit and write down in relation to: 
  • The alleged “mischaracterization” of hardware that HP did not realize Autonomy sold, as I understand this would have no effect on annual top or bottom lines and a minor effect on gross margin within normal fluctuations and no impact on growth, assuming a steady state over the period;
  • The alleged “inappropriate acceleration of revenue recognition with value-added resellers” and the “[creation of] revenue where no end-user customer existed at the time of sale”, given their normal treatment under IFRS; and
  • The allegations of incorrect revenue recognition of long-term arrangements of hosted deals, again given the normal treatment under IFRS.
Of course there are other questions including how such improprieties could happen with so many due diligencers on the case during the courting process and why HP management would sit on the possibility of a material event for six months, but the arithmetic would be a nice start. Life doesn't have answer keys, you know.

Letter 20121127

[via WSJ]