Good News – Autonomy CFO Jailed

Good news – former CFO of public company jailed for fiddling the accounts. Oh to see that happen more often so as to deter manipulation of accounts that is so prevalent and so damaging to investors.

Sushovan Hussain, the former CFO of software company Autonomy, was sentenced to 5 years imprisonment by a US Court yesterday plus he was fined $4 million and ordered to forfeit $6.1 million he made from the sale of the company to Hewlett-Packard. He won’t even be spending time in a cushy minimum-security prison as he is a foreign national. He was found guilty some months ago on 16 counts of security fraud and other counts. In essence the allegation was that sales were inflated in the accounts and the result was that when HP bought the company, they had to write off much of the $11 billion they paid for it.

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 is still being pursued in the English courts, and the latter also faces criminal charges in the USA.

Mr Hussain is planning to appeal the verdict. Let us hope he does not succeed because such cases provide a good deterrent to future malefactors.

These were some of the allegations against Autonomy:

  • Booking transactions to resellers as revenue when there was no end-user license (i.e. “channel stuffing” as it is sometimes called).
  • Engaging in “round-trip” transactions where purchases were invented so it could pay money to companies which then returned it to Autonomy to cover fictitious sales.
  • Backdating sales transactions so they fell into a previous accounting period.

There was also a claim that bundles of hardware/software sales were treated as solely software in the accounts. Why does this matter? Because software sales are valued in company valuations much more highly than hardware sales.

The above are some of the things that investors in IT companies need to look at although abuse can be difficult to spot in the published accounts of a public company. High accounts receivable and apparent lengthy payment delays can be clues. There were some questions raised about Autonomy’s accounts even before the takeover.

Hussain and Lynch have claimed that some of the disputed differences were simply down to different accounting standards (US GAAP versus IFRS) and I said when originally commenting on the case that I was unsure that this stood up to scrutiny. The US Court judge clearly rejected that argument.

But the sad thing is of course that we rarely see such cases pursued to criminal convictions in the UK, whether they are large or small companies.

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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