Caveat Emptor

A buyer who looks to an audit
Of a target before having bought it,
May leave itself open
In spite of all hopin',
To sellers' attempts to defraud it.

Years ago, an accounting professor visited a class of credit risk analysis trainees, of which I was one, and told us that "a financial statement is like a bikini: what it reveals is interesting, but what it conceals is vital." Every so often, I have cause once again to ponder the professor's sage insight. Today, for example, comes news of an $8.8 billion accounting fraud allegedly perpetrated on HP by management of the software company Autonomy, which $HPQ acquired last year for $11.1 billion. Autonomy's key product is IDOL, a software package that allows big users to crunch big data and find patterns and meaning in it. HP alleges that, notwithstanding clean audits by Deloitte, Autonomy's pre-acquisition financial statements contained -

The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale. This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.

Somewhere, my old accounting professor is smiling ruefully.