Most alleged accounting fraud cases are associated or to some extent involve one of the Big Four accounting firms (Ernst & Young, KPMG, Deloitte or PwC), but in the alleged fraud related to the IT giant Hewlett-Packard’s (HP) acquisition of British software company Autonomy, three of the Big Four firms might or are already facing scrutiny by lawyers and the profession’s regulators.
For those less familiar with the events here is a quick timeline:
In October 2011 HP acquired Autonomy for $11.1bn, but a year on HP found – PwC carried out the forensic work on their behalf – accounting improprieties and misrepresentations in Autonomy’s accounts prior to the acquisition. The irregularities have led to HP having to write off over $5bn from the initial deal worth $11.1bn, which sparked anger from HP’s management and shareholders.
Soon after the write-off was announced, November 2012, HP’s shareholders filed a suit in California seeking damages from Deloitte, which audited Autonomy and KPMG, which was drafted in to oversee the work on the deal.
Since, a third firm was dragged into the scandal, Ernst & Young, with investor group Change to Win calling for HP to ditch its auditor as a result of the issues related to the acquisition.
Regulators on both sides of the pond are watching the situation closely and yesterday the UK Financial Reporting Council (FRC) said it is to investigate Autonomy’s accounts for the time period 1 January 2009 and 30 June 2011. Likely to mainly be focus on the work of Deloitte, which was the company’s auditor at the time.
The investigation is at its early days with the FRC only looking to establish whether there is a case to be made and a tribunal called, which is very much a standard reaction from the watchdog in such cases.
The FRC has looks at a lot of cases involving UK accounting firms and alleged improprieties and only last year issued its record fine of £1.4m to PwC UK over the firm’s handling of JP Morgan securities audit.
In the US the Securities and Exchange Commission is currently reviewing HP’s annual filing, which is the first document to give insight on some of the accusation made by HP, which have thus far been backed with little evidence.
Accounting firms involved in the deal are likely to face several more months if not years of difficult questions over their work and involvement in the HP/Autonomy deal, however often firms are in the right and apart from some exceptions in the US, the litigation arena has been relatively quiet in relation to accounting firm liability. For example at the end of 2012 the Olympus scandal shook the core of the Japanese accounting profession as a hole of $1.7bn was discovered in the company’s accounts. Despite the initial criticism aimed at auditors the regulator gave a pass to Ernst & Young and KPMG Japan and mainly blamed the management for hiding the losses from the auditors.
Whether or not Deloitte, KPMG and E&Y are responsible for the alleged errors (currently they are vigorously defending their work) is hard to say, however from a reputational point of view this is the last thing any of the firms need as accounting market concentration debates and controversial tax avoidance schemes are already aiming the spotlight firmly on the Big Four. As the accounting giants business is purely services based reputation and maintaining client trust is at the heart of the business and if lost could have some serious consequences.
It is also hard to pass judgment without any hard evidence as thus far former Autonomy executives and the accounting firms have all vigorously defended their work.
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