Autonomy trial The judge in the Autonomy trial at London's High Court has questioned a key plank of HPE's case against former execs Mike Lynch and Sushovan Hussain, asking whether Autonomy's accounting practices were in fact fraudulent – which is what HPE has alleged.
In a pointed exchange during HPE barrister Laurence Rabinowitz QC's explanation of what he said was a revenue-pumping deal Autonomy struck in 2009 for its Digital Safe and eDiscovery software products, judge Mr Justice Hildyard wondered aloud whether Autonomy was simply accounting for its sales in an unusual way.
"Is this an accounting point? It is everyday practice for businesses to offer the alternative of a lesser immediate payment in place of a larger but deferred payment," said the judge.
In its written submissions to the High Court, HPE said: "The obvious and inevitable consequence of this shift in hosting model and approach to revenue recognition – which the Defendants undoubtedly appreciated and indeed intended – was to inflate Autonomy's current hosting revenue and profits at the expense of future hosting revenue and profits."
HPE alleged that "around $125m of revenue was accelerated in this manner".
Mr Justice Hildyard did not appear impressed by HPE's arguments on this point. He observed that Autonomy's customers "got the same services, they were recharacterised for accounting purposes. Does that relate to the new service, the misrepresentation [argument], or what?"
Rabinowitz blustered. "Your lordship is right to say 'is this just an accounting point if all is being provided is a service?'... What you're effectively doing is artificially trying to extract upfront money by selling something the customer has no interest in hosting. All it wants is the service. But what you've done by artificially breaking down the product is to find some basis – the customer may not mind paying less, but it's an artificial device and it's used to dress up the accounts."
SaaS and hybrid accounting
Autonomy would sell either software product with an upfront licence fee, support fees and fees for "hosting and related ongoing services", called the hybrid model. This was sold at a cheaper total cost of ownership for the customer than sales via the traditional SaaS model – and Autonomy would account upfront for all of the hybrid revenue, rather than doing so over time as customers paid their ongoing fees.
The judge hunched forward over his screens, peering at Rabinowitz through his glasses. "In a particular example, when I buy a magazine, I agree to pay £12 upfront instead of £2.50 every week. I don't think I'm being defrauded... what I'm getting at, does [HPE's allegation that Autonomy's hybrid revenue accounting was fraud] really translate into an accounting difference? What's the differentiator between that and the common anodyne example I have given you?"
My lord, if both the services your lordship identified are not a service but a sale, that's the first point to make. If what you're talking about is a sale, then it doesn't really matter whether you pay upfront or in instalments. It's revenue you can recognise. When you're dealing with a service, as your lordship sees, the ways which you recognise revenue on a service is over the period the service is provided.
If Digital Safe and eDiscovery were services that were instead sold as products, HPE alleged, Autonomy should not have accounted for those as upfront revenues. A central plank of HPE's raft of allegations against Lynch and Hussain is that the two led the effort to wrongly inflate Autonomy's revenues in its accounts through what HPE claims was deliberate fraud based on accounting irregularities such as these.
In the specific Filetek deal HPE used to describe the allegedly dodgy accounting, it said in written submissions "that FileTek received funds from Autonomy before it was required to make any payments under the first FileTek sale". The deal involved Filetek selling its own products with Autonomy software bundled within them.
Mike Lynch's defence team are expected to begin the opening arguments of their case, responding to HPE's allegation, this afternoon. The case continues. ®