4 ms·

I once asked this when I started at the hedge fund I currently work at. The answer I got was that for a large company, hiding things on the balance sheet is li

I once asked this when I started at the hedge fund I currently work at. 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

cperciva 14y ago
I understand that due diligence is hard and there's always going to be things which get missed... but I have trouble understanding how it's possible to miss 8.8 billion dollars.
- chollida1 14y ago
  > but I have trouble understanding how it's possible to miss 8.8 billion dollars. 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.
- jfb 14y ago
  It's also not in anyone's immediate short-term interest to find a reason to scotch an 1.0x10^10$ deal, and whatever we'll kick this stinker of a deal down the road for the next CEO/CFO/&c.
- benth 14y ago
  I agree. When I heard HP was buying Autonomy for that much, I immediately thought of MS's purchase of aQuantive. And now both end up with huge write-downs.
chernevik 14y ago
Here the fundamental problem seems to be a very poor understanding of Autonomy's marketing and margins models. 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.
- objclxt 14y ago
  > "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.
  - chernevik 14y ago
    The point is that a proper understanding of the business model allows you to conduct valuations, capturing all revenues and expenses, away from the financial statements. Those should absolutely reconcile back to statements. But they aren't driven by statement classification of items. Properly done, those models would have shown these problems. 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.
    - 14y ago
loceng 14y ago
Wouldn't doing due diligence mean you spend this time, however long it requires, to find out the reality of the company? From another commenter who worked there, said KPMG (and Deloitte) were the auditors, and I can imagine HP would be suing them..
- chollida1 14y ago
  > Wouldn't doing due diligence mean you spend this time, however long it requires, to find out the reality of the company? 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.
  - loceng 14y ago
    Okay, sure. Though it's $8 billion; 80% of the value paid! It seems like the there would have been wiring exposed, pipes burst and water leaking and doing external, visible damage..
    - josephlord 14y ago
      There was a common view at the time that they had significantly overpaid and that was based on the straight books. Also only $5BN of the write down was for Autonomy. If they overpaid by 100% (possible as they paid 64% over the share price which could also have been overvalued) then it could be that accounting irregularity accounts only for a fraction of the write down. 10-20% of the purchase price feels as likely as 80% but we may see when it is investigated. http://www.hp.com/hpinfo/newsroom/press/2011/110818xc.html http://www.hp.com/hpinfo/newsroom/press/2011/110818xc.html
specialist 14y ago
From what I've read: Audits verify the math, not detect fraud. Fraud detection is a lot more work aka forensic accounting.
- justincormack 14y ago
  Of course one of Autonomy's biggest markets was fraud detection software and discovery services for lawsuits...

cperciva 14y ago

I understand that due diligence is hard and there's always going to be things which get missed... but I have trouble understanding how it's possible to miss 8.8 billion dollars.

chollida1 14y ago
> but I have trouble understanding how it's possible to miss 8.8 billion dollars. 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.
jfb 14y ago
It's also not in anyone's immediate short-term interest to find a reason to scotch an 1.0x10^10$ deal, and whatever we'll kick this stinker of a deal down the road for the next CEO/CFO/&c.
benth 14y ago
I agree. When I heard HP was buying Autonomy for that much, I immediately thought of MS's purchase of aQuantive. And now both end up with huge write-downs.

chernevik 14y ago

Here the fundamental problem seems to be a very poor understanding of Autonomy's marketing and margins models. 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.

objclxt 14y ago
> "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.
- chernevik 14y ago
  The point is that a proper understanding of the business model allows you to conduct valuations, capturing all revenues and expenses, away from the financial statements. Those should absolutely reconcile back to statements. But they aren't driven by statement classification of items. Properly done, those models would have shown these problems. 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.
  - 14y ago

loceng 14y ago

Wouldn't doing due diligence mean you spend this time, however long it requires, to find out the reality of the company? From another commenter who worked there, said KPMG (and Deloitte) were the auditors, and I can imagine HP would be suing them..

chollida1 14y ago
> Wouldn't doing due diligence mean you spend this time, however long it requires, to find out the reality of the company? 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.
- loceng 14y ago
  Okay, sure. Though it's $8 billion; 80% of the value paid! It seems like the there would have been wiring exposed, pipes burst and water leaking and doing external, visible damage..
  - josephlord 14y ago
    There was a common view at the time that they had significantly overpaid and that was based on the straight books. Also only $5BN of the write down was for Autonomy. If they overpaid by 100% (possible as they paid 64% over the share price which could also have been overvalued) then it could be that accounting irregularity accounts only for a fraction of the write down. 10-20% of the purchase price feels as likely as 80% but we may see when it is investigated. http://www.hp.com/hpinfo/newsroom/press/2011/110818xc.html http://www.hp.com/hpinfo/newsroom/press/2011/110818xc.html

specialist 14y ago

From what I've read: Audits verify the math, not detect fraud. Fraud detection is a lot more work aka forensic accounting.

justincormack 14y ago
Of course one of Autonomy's biggest markets was fraud detection software and discovery services for lawsuits...