Five ways in which the British software company is alleged to have cooked the books

(Observer (UK) Via Acquire Media NewsEdge) 'CHANNEL STUFFING' The most serious of the allegations HP has made against unnamed members of Autonomy's management team. A spokeswoman for Lynch has denied any suggestions that the tactic was used.

Channel stuffing involves offloading excessive amounts of product to resellers ahead of demand. Typically, the reseller is charged little or no money up front, and may not be obliged to pay unless they sell the product on. In accountancy terms, a line is crossed if those deals are booked as revenue before an end customer has actually bought the product.

Autonomy had hundreds of resellers, one of which was Tikit, which specialises in legal and accountancy software and has just been bought by BT. In December 2010, Tikit reported a surge in the amount of inventory on its books, up from pounds 100,000 worth per half year to pounds 4m. Peel Hunt analyst Paul Morland says Tikit told him that it had done a big deal to acquire software at a discount.

Tikit declined to comment and there is no evidence that Autonomy booked the deal as revenue. A spokeswoman for Lynch insisted Autonomy never recognised revenue from resellers if there was a right of return, and that such a right was almost never granted.

USING ACQUISITIONS AS A SMOKESCREEN In Autonomy's last full year as an independent company, it claimed to be growing at 17%. But one financial analyst has claimed it was using its purchases to mask the fact that there was no growth at all. Over six years, Autonomy bought at least eight sizeable businesses. "Once they had bought the company they would close parts of the business down," says Daud Khan, who followed Autonomy while working at JP Morgan Cazenove, and is now at Berenberg Bank. "Closing down a business costs money but the restructuring charges were always very low." Lynch's spokeswoman says Autonomy's accountant, Deloitte, checked every acquisition.

DESCRIBING HARDWARE SALES AS SOFTWARE SALES HP said Autonomy sold hardware that was wrongly labelled in its accounts as software and sold hardware at "negative margin", in other words at a loss, and charged it as a marketing expense. The sale was then chalked up as licence revenue for growth calculations. HP said these sales accounted for up to 15% of Autonomy's total revenue, which was estimated at $1bn in 2011.

Lynch said it was "no secret" Autonomy sold hardware, and it accounted for around 8% of revenue. The company would sometimes supply desktop computers to clients as part of a package. In some cases, Lynch said, deals were struck at a slight loss, in exchange for the client agreeing to market Autonomy products. These losses were then charged as a marketing expense. Crucially, he claims those sales accounted for less than 2% of total revenues.

EXAGGERATING SEARCH REVENUES FROM OTHER SOFTWARE COMPANIES Autonomy's top product is a search engine called IDOL (Intelligent Data Operating Layer), but Autonomy has rebranded less expensive products as IDOL, such as the document filter produced by a company called Verity it bought in 2005.

A week after HP announced it was prepared to acquire Lynch's company at a 64% premium to its share price, Leslie Owens at Forrester Research published a piece in which she declared the development of IDOL was "stagnant", with no major release in five years.

Lynch's spokeswoman said there was no exaggeration of revenues from other software companies.

FRONTLOADING REVENUES Changing the payment model for storing large digital archives on behalf of customers is another way in which HP believes Autonomy boosted revenues. Red flags were raised by analysts after Autonomy's 2007 acquisition of a US email archiving company called Zantaz, whose clients included nine of the world's top 10 law firms. Khan claims Autonomy renegotiated contracts so that instead of spreading payments over a three- or four-year contract, it would take a big lump sum upfront and smaller payments in subsequent years.

Lynch's spokeswoman said this was not an accurate characterisation of the changes: Zantaz customers that had been pay-as-you-go committed to much larger deals once Autonomy took over, often including on-premises software.

(c) 2012 Guardian Newspapers Limited.

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