Case Study: Accounting Improprieties in Hp’s Purchase of Autonomy

Introduction
familiarity, a British software maker was acquired by Hewlett-Packard in 2011 for $11.1 billion. Following the purchase, gross gross revenue have dropped significantly, prompting HP to rout Mike Lynch, founder of familiarity, and s dying their own auditing team to recap its books. From the following months of investigation, HP has accused Autonomy of tampering with its books, inflating its sales before the deal. The accounting improprieties went undetected by outside accountants before the deal. The costs of the accounting issues cost HP approximately $5 billion dollars.

The Alleged Fraud
According to Hewlett-Packard, before the acquisition, Autonomy was selling ironware at a loss. Selling rough hardware products had a very low margin to take a loss. Then the software company went around and booked these sales as high-margin software sales. Instead of booking them as a cost of goods sold, they were booked as a marketing spending. Also, Autonomy was selling software to value-added resellers where there were ultimately no end users. This inflated revenue as well. Finally, Autonomy converted some long term hosting deals to short term licensing deals. Future revenues were and then recorded all at once in the books kinda of being deferred into the future.

Accounting Analysis of the Fraud
1.Booking sales as high margin sales

Dr.



Cash/Account ReceivableDr. marketing Expense (instead of COGS)
Cr. RevenueCr. Inventory

Effect:
The result of debiting marketing expense instead of cost of goods sold account is a pocket-size COGS account and therefore higher profits on the books. At a risk of a hit to net income (because expenses went up), Autonomy presented higher profit margins from its software sales than actually indicated.

2. rising prices of revenues

Dr. Cash/Account Receivable
Cr. Revenues(inflated value)
Upon sale from value-added reseller:
Dr. Unearned revenues
Cr. realize revenue (from books of value-added retailer)
Effect:
The added value...If you want to get a climb essay, order it on our website: Orderessay



If you want to get a full essay, wisit our page: write my essay .