Autonomy, FRC Meeting, Retailers and Brexit Legal Advice

The big news last Friday (30/11/2018) was that former CEO Mike Lynch has been charged with fraud in the USA over the accounts of Autonomy. That company was purchased by Hewlett Packard who promptly proceeded to write off most of the cost – see this blog post for more information: https://roliscon.blog/2018/06/02/belated-action-by-frc-re-autonomy/. As this was a UK company, are we anywhere nearer a hearing in the UK over the alleged “creative accounting” that took place at the company and the failure of the auditors to identify anything amiss? That’s after 8 years since the events.

As I was attending a meeting held by the Financial Reporting Council (FRC) for ShareSoc and UKSA members yesterday, I thought to review the past actions by the FRC on this matter. In February 2013 they announced an investigation but it took until May 2018 to formally announce a complaint against auditors Deloitte and the former CFO of Autonomy Sushovan Hussain who has already been convicted of fraud in the USA. On the 27th November, the action against Hussain was suspended pending his appeal against that conviction, but other complaints were not. But why the delay on pursuing the auditors?

The FRC event was useful in many ways in that it gave a good overview of the role of the FRC – what they cover and what they do not cover which is not easy for the layman to understand. They also covered the progress on past and current enforcement actions which do seem to have been improving after previous complaints of ineffectiveness and excessive delays. For example PWC/BHS was resolved in two years and fines imposed are rising rapidly. But they still only have 10 case officers so are hoping the Kingman review of the FRC will argue for more resources.

It was clear though that audit quality is still a major problem with only 73% of FTSE-350 companies being rated as 1 or 2A in the annual reviews when the target is 90%. The FRC agreed they “might be falling short” on pursuing enforcement over poor quality audits. So at least they recognise the problems.

One useful titbit of information after the usual complaints about the problems of nominee accounts and shareholder rights were made (not really an FRC responsibility) was that a white paper on the “plumbing” of share ownership and transactions will be published on the 30th January.

There were lots of interesting stories on retailing companies yesterday. McColl’s Retail Group (MCLS) published a very negative trading update which caused the shares to fall 30% on the day. Supply chain issues after the collapse of Palmer & Harvey are the cause. Ted Baker (TED) fell 15% after a complaint of excessive hugging of staff by CEO Ray Kelvin. This may not have a sexual connotation as it seems he treats male and female staff similarly. Just one of the odd personal habits one sees in some CEOs it seems. Retail tycoon Mike Ashley appeared before a Commons Select Committee and said the High Street would be dead in a few years unless internet retailers were taxed more fairly. He alleged the internet was killing the High Street. But there was one bright spark among retailers in that Dunelm (DNLM) rose 14% after a Peel Hunt upgraded the company to a “buy” and suggested that they might be able to pay a special dividend next year. There was also some director buying of their shares.

Before the FRC meeting yesterday I dropped in on the demonstrations outside Parliament on College Green. It seemed to consist of three fairly equally balanced groups of “Leave Means Leave” campaigners, supporters of Brexit and those wishing to stay in the EU – that probably reflects the composition of the Members in the House across the road. You can guess which group I supported but I did not stay long as it was absolutely pelting down with rain. There is a limit to the sacrifices one can make for one’s country.

But in the evening I did read the legal advice given to Parliament by the attorney-general (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/761153/EU_Exit_-_Legal_position_on_the_Withdrawal_Agreement.pdf

Everyone is looking very carefully at the terms of the Withdrawal Agreement that cover the Northern Ireland backstop arrangements. The attorney-general makes it clear that the deal does bind the UK to the risk of those arrangements continuing, although there is a clear commitment to them only lasting 2 years when they should be replaced by others. There is also an arbitration process if there is no agreement on what happens subsequently. However, he also makes it clear that the Withdrawal Agreement is a “treaty” between two sovereign powers – the UK and the EU.

Treaties between nations only stick so long as both parties are happy to abide by them, just like agreements between companies. But they often renege on them. For example, the German-Soviet non-aggression pact in 1939 was a notorious example – Hitler ignored it 2 years later and invaded Russia. Donald Trump has reneged on treaties, for example the intermediate nuclear weapons treaty last month. Similarly nations and companies can ignore arbitration decisions if they choose to do so.

What happens after 2 years if no agreement is reached and the UK insists on new proposals re Northern Ireland? Is the EU going to declare war on the UK? We have an army but they do not yet have one. Are they going to impose sanctions, close their borders or refuse a trade deal? I suspect they would not for sound commercial reasons.

Therefore my conclusion is that the deal that Theresa May has negotiated is not as bad as many make out. Yes it could be improved in some regards so as to ensure an amicable future agreement but I am warming to it just like the Editor of the Financial Times recently. He did publish a couple of letters criticising his volte-face when previously he has clearly opposed Brexit altogether, but changing one’s mind when one learns more is just being sensible.

Note: I have held or do hold some of the companies mentioned above, but never Autonomy. Never did like the look of their accounts.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Belated Action by FRC Re Autonomy

I commented previously on the conviction of former Autonomy CFO Sushovan Hussain for fraud in relation to the accounts of Autonomy Plc (see https://roliscon.blog/2018/05/02/they-do-things-differently-in-the-usa/ ). Just to show that this was not solely a case prompted by Hewlett Packard over their disastrous acquisition of the company and supported by a partisan California court as some have alleged, the Financial Reporting Council (FRC) have now announced formal complaints over the conduct of auditors Deloittes and senior finance staff of Autonomy – including Mr Hussain.

Allegations include: failings by the auditors to adequately challenge Autonomy’s accounting and disclosure of its purchases and sales of computer hardware; adequately to challenge Autonomy’s accounting for transactions with value added resellers (“VARs”) and to correct false or misleading communications made by Autonomy to the Financial Reporting Review Panel (“FRRP”) of the FRC.  Sushovan Hussain and Stephen Chamberlain are alleged to have breached the fundamental principle of integrity by acting dishonestly and/or recklessly when preparing and approving Autonomy’s Annual Report and Accounts for the years ended 31 December 2009 and 31 December 2010 and related charges.

There will be tribunal hearing to hear these complaints for which a date has not yet been set. It seems likely that the claims will be defended.

So 8 years later we have a non-criminal action by the regulatory authorities in the UK over accounting and audit failures while the US prosecuted for fraud. Surely this is not good enough if the allegations are true? Plus it’s been too long before action has been taken. If the claims are upheld then the accounts were wrong and sufficiently wrong not just to mislead the investors in Autonomy but to prompt Hewlett Packard to purchase the company at a grossly inflated price – that is their claim which is the subject of an on-going civil action. But it could also be seen as a fraud on stock market investors which is a criminal offence in the USA but not the UK. That is what needs changing.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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They Do Things Differently in the USA

Former Autonomy CFO Sushovan Hussain has been found guilty of 16 counts of fraud in a Federal Court in California. He was convicted on all 16 counts of wire and securities fraud. This case was based on allegations of false accounting to ramp up the value of the Autonomy business prior to its acquisition by Hewlett-Packard. The latter subsequently wrote down most of the $10.3 billion cost of that acquisition.

More background on this case is given in a previous blog post here: https://roliscon.blog/2018/02/26/autonomy-legal-case-and-revenue-recognition/

Although Autonomy was a UK public company, and the Serious Fraud Office did look at the case they decided to do nothing. However a civil action against Mr Hussain and the former Autonomy CEO, Mike Lynch (who was not indicted in the US case), is still being pursued in the English courts. This decision will clearly strengthen that action.

The US prosecutor suggested in court that the accounts were a façade and eventually proved to be an “unsustainable Ponzi scheme”. Mr Hussain is apparently likely to appeal the verdict, but he faces a prison sentence of up to 20 years – sentencing will take place on Friday.

How different to the UK where prosecutions for fraud based on false accounting almost never take place. Questions were raised about the accounts of Autonomy by investors and a whistle blower also raised issues before the sale to H/P but the UK authorities did nothing. The FRC did announce an investigation into the accounts of Autonomy in 2013. It is still listed as a “current” case on their web site, i.e. no report and no conclusions as yet. Why the delay?

This case demonstrates the typical sloth and inaction of the UK regulatory authorities in comparison with the USA. The FCA/FRC are both very ineffective, and the recent events regarding the Aviva preference shares and the collapse of Beaufort show how ineffective those bodies are in protecting the interests of investors. It’s a combination of a defective legal system and a culture of inaction and delay that permeates these organisations. Well at least that is my personal view.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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