AutonomyCorporation Accounting Scandal
AutonomyCorporation Accounting Scandal
AutonomyCorporation, now known as Hp Autonomy was founded in 1996 atCambridge, United Kingdom. Hp Autonomy is a multinational companythat deals with software development. In October 2011,Hewlett-Packard (HP) acquired the software company and that is whereit derived the name HP Autonomy. One year after the company`sacquisition, HP wrote off 8.8 billion dollars of AutonomyCorporation’s value citing serious accounting scandal. In November2012, HP made it public that they were taking 8.8 billion accountingcharge because of serious outright misrepresentations and accountingimproprieties. Deloitte and Touche is the CPA firm that wasresponsible for auditing the accounts of Autonomy Corporation beforethe merger. This paper analyzes the audit report that the firm issuedand discusses the legal liability to third parties who relied on thefinancial statements. The paper also speculates the generallyaccepted auditing standard (GAAS) that the company violated andcompares the responsibility of both the auditing firm and managementfor financial reporting. Finally, it analyzes the sanctions availableunder SOX and recommends the key actions that the PCAOB should takein order to hold management or the audit firm accountable for theaccounting irregularities.Discussion A review ofthe audit report issued by Deloitte and Touche reveal that the auditfirm did not act professionally because some misleading informationwas issued. Autonomy’s 2011 sales revenue were overstated by 5.5billion and the auditing firm did not identify an error or fraud.Further analysis reveal that Autonomy made losses in low-end hardwareand reported this as software revenues. 15 percent of Autonomy saleswere hardware sales that resulted in negative margins, but the firmreported this as software revenues. In addition, the audit reportstated that Autonomy is a pure software company but evidenceavailable reveal otherwise. Analysis also reveal that Autonomy didnot submit critical documents, but Deloitte and Touche did notcapture this. Despite all this misrepresentations, the auditingcompany issued a report stating that the accounts represent a trueand fair reflection of the Autonomy’s financial performance(Autonomy Corporation Annual Reports 2012, p.13). When auditingfirms fail to act professionally or fail to detect fraud or error inpart of the reporting company, third parties who use the financialstatements are mislead. Under common law, audit firms are liable fortheir clients for losses incurred as a result of the auditors failureto act professionally. In practice, even ordinary negligence isenough misconduct to hold auditors liable to losses incurred by thirdparties. Auditors also have liabilities to third parties underfederal securities laws. Individuals or groups who buy and sellcompanies securities rely on the financial statements audited by theaccounting firm and in case of misrepresentation, the auditors can besued. In the case an audit firm colludes with the client to publishmisleading information, they can be sued for violation of differentstatutes. In the case of Autonomy corporation, Deloitte and Touchecan be sued for negligence although this is very hard to establish(Jones, 2011). In carrying out the audit function, auditorsfollow the Generally Accepted Auditing Standards (GAAS) which are setof principles through which the quality of accounts is judged. In theUnited States, there are ten GAAS standards that are prescribed bythe Auditing Standards Board (ASB). In Autonomy Company’s case, theauditor (Deloitte) violated one of the fieldwork standards whichstates that the auditor must obtain sufficient evidence by performingthe necessary audit procedures before issuing an opinion. It is clearthat Deloitte did not correct enough data to determine whether thestatements presented by the company were true and fair. Anindependent auditor has the responsibility of ascertaining that thefinancial statements presented by the management regarding thefinancial position, results of operations, and cash flows are inconformity with the generally accepted accounting principles. Theauditor’s report provides the auditors with a medium to expresstheir opinion towards a firm’s financial statement. If the auditorsare dissatisfied with the way in which the financial statements areprepared, they can issue a disclaimer of opinion. In short, theauditor should state whether the financial statements are free frommisinformation caused either by error or fraud. Management has aresponsibility of preparing sound financial statements that areconsistent with the management’s report. Management should ensurethat all its assets, liabilities, equity, revenues, expenses and cashflows are well recorded and they present a fair view of the company’sperformance without error or fraud. To achieve this, managementshould maintain strong internal controls. Although both the partieswere at fault in Autonomy’s case, the management should carry agreater burden because they failed to present accurate information.The auditor may have relied on the information issued by themanagement (Jones, 2011). Public accounting firms areinvestigated and disciplined in case of irregularity by PCAOB. Auditfirms are required y PCAOB to comply with Sarbanes-Oxley Act of year2002, the Securities and Exchange Commission (SEC), and PCAOB rules.In case the rules are violated by an auditing firm, the PCAOB has aright to impose the appropriate sanctions. However, the disciplinaryaction taken by the PCAOB taken by the PCAOB is required to beconfidential and non-public by the SOX Act. In the case of AutonomyCorporation, the PCAOB may decide to take away the license of theauditing firm, the management can be sued in a court of law. Takingthe license of the audit firm would act as a warning of otherauditing firms to act professionally. The challenge withadministering this disciplinary Act is that there must be enoughevidence to prove negligence (Jones, 2011).
Autonomy Corporation (2011). Autonomy Corporation Annual Report 2011.Autonomy Corporation: London
Jones, M. (2011). Creative accounting, fraud and internationalaccounting scandals. Chic ester, West Sussex, England Hoboken,NJ: John Wiley & Sons.