Good morning. Earlier this week, I wrote about how Sushovan Hussain, the former CFO of Autonomy, a software company founded by the late British tech entrepreneur Mike Lynch, cooked the books and landed in prison for five years and how, in July, he was banned from accounting until 2038.
About a year after HP acquired Autonomy in 2011 for $11.1 billion, the tech giant accused Autonomy of accounting fraud. Lynch was acquitted and Hussain was found guilty of 16 counts of fraud in 2018. Back-dated contracts, round-trips, and channel stuffing are at least three of the fraudulent accounting practices. But what do these practices entail? I talked with experts to find out more.
John M. Veitch, dean for the School of Business and Management at Notre Dame de Namur University, told me that round-tripping is a sales scheme. Essentially, one company sells an asset to another company, while agreeing to buy it back for about the same price.
"For instance, say a company may be missing its revenue targets by $1 million for Q4 2023,” Veitch explained. “Using round-tripping it would send out $1 million of product to distributors or retailers with a guarantee to buy back the product for $1.1 million in the next accounting period. The firm improperly recognizes the $1 million as revenue for Q4 2023, even though it was not a real sale, and will have additional expenses of $1.1 million in the next period.”
In Autonomy's case the round-tripping “appears to be a little more complex,” Veitch said. What was sold was hardware, but it booked these sales as software contracts instead, he said. “The rationale was that hardware sales have low-profit margins, while software contracts tend to have much higher profit margins,” Veitch explained. So, HP would value software sales more highly than hardware sales.
“I can't find details but I imagine that Autonomy bought the hardware back in a later period as hardware, not as a software contract,” he said. “This is the only ‘sophisticated’ piece to the accounting fraud I can find in the public record.”
In general, the boundaries and ethical guidelines for accounting are always set by the company’s board, Shane Goodwin, associate dean, and a finance professor at the Cox School of Business at Southern Methodist University, told me. Goodwin also serves as chair of the audit committees on the boards of Principal Private Credit Fund and Principal Real Asset Fund.
Boards collaborate with leadership, starting with the CEO, then the CFO and audit teams, he said. “We also work closely with the outside auditors to make sure we’re understanding everything that’s going on with the company from an audit perspective,” Goodwin said.
You can read more about my conversation with Veitch and Goodwin regarding Hussain's fraudulent accounting practices here.
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna
