Deloitte, HP And Autonomy: You Lose Some But You Win Some More, Much More
When HP announced its intention to acquire Autonomy, the British data analysis firm now mired in accusations of serious fraud, Deloitte probably shed some enormous tears of joy. Deloitte was more than happy, I’m sure, to rid itself of the Autonomy audit albatross. That may surprise some of you, since Deloitte UK was the long time auditor of Autonomy, and would lose that job and its nice fees, to HP’s auditor Ernst & Young.
To the victor’s auditor go the audit spoils.
But that’s not how the Big Four audit industry game is played now that consulting is again King. What Deloitte would lose in audit fees – reportedly £5.422m for Autonomy’s audits during the last four years – the firm could now openly replace with guilt-free consulting.
According to filings, Deloitte earned an additional £4.44m from Autonomy in the last four years for services such as tax compliance, due diligence for acquisitions and other services “pursuant to legislation”. As the preeminent Big Four tax services provider, HP’s auditor Ernst & Young, HP’s auditor, would likely start doing everything tax related for Autonomy. However, Deloitte was now free to team with Autonomy and all of its technology products as an alliance partner for systems integration engagements. That could be worth billions in consulting revenue that Deloitte’s UK firm, at least, had given up to be the auditor of a fast growing, highly acquisitive technology “Fast 50” firm.
There are differences in the legislation enacted to restore confidence in audits by the United States after Arthur Andersen’s Enron piggishness – Sarbanes-Oxley – and the regulations that govern UK listed companies and their auditors. For example, the UK does not bar an auditor from also providing internal audit services to a company it audits.
Regulations in the US and UK do prohibit business alliance relationships between an auditor and its audit client. The Financial Reporting Council (FRC) is the UK’s lead audit regulator. APB Ethical Standard 2, Financial, Business, Employment and Personal Relationships, states:
Audit firms, persons in a position to influence the conduct and outcome of the audit and immediate family members of such persons shall not enter into business relationships with an audited entity, its management or its affiliates except where they involve the purchase of goods and services from the audit firm or the audited entity in the ordinary course of business and on an arm’s length basis and which are not material to either party or are clearly inconsequential to either party.
Business relationships, says the FRC, may create self-interest, advocacy or intimidation threats to the auditor’s objectivity and perceived loss of independence.
Examples of prohibited business relationships include “arrangements to combine one or more services or products of the audit firm with one or more services or products of the audited entity and to market the package with reference to both parties or distribution or marketing arrangements under which the audit firm acts as a distributor or marketer of any of the audited entity’s products or services, or the audited entity acts as the distributor or marketer of any of the products or services of the audit firm.”
In 2010 Autonomy was named a Deloitte UK Technology Fast 50 company, one of the UK’s fastest growing technology companies. Deloitte UK was officially prohibited from jointly marketing its consulting services with Autonomy or reselling Autonomy’s products such as IDOL or popular products acquired while it was the auditor of Autonomy. Popular Autonomy software includes Interwoven, Verity, and Meridio for government and defense contractors. That must have been tough.
But that didn’t stop the consulting practices of other Deloitte member firms all over the world from taking advantage of the popularity of Autonomy products to boost their revenues. In March of 2011, less than six months before HP announced its acquisition of Autonomy, Deloitte Luxembourg announced it had selected Autonomy’s Intelligent Data Operating Layer (IDOL) as a vendor “to better manage information and knowledge within the firm to increase productivity.” In addition, Autonomy would further collaborate with Deloitte to “fast-track its technology to Deloitte Luxembourg’s extensive customer base…”
Deloitte UK, and its fellow Deloitte firms all over the world, are allowed to be customers of an audit client of one of them such as Autonomy “in the ordinary course of business”. They are customers of Autonomy. Autonomy lists Deloitte entities and Ernst & Young, HP’s auditor, as customers on numerous websites and in marketing materials and case studies. In 2011, digital agency Roundarch, founded in June 2000 by Deloitte and WPP, also selected Autonomy’s cloud-based comprehensive data backup and recovery solutions for its own operation. This privately owned company was operated by its senior management until February 2012 when Aegis Group plc acquired the digital agency. The Aegis Group plc auditor is Ernst & Young.
But were Deloitte non-UK member firms allowed to sign marketing and reselling contracts as Autonomy alliance partners while Deloitte UK audited this multinational company with business operations and customers all over the world? For example, given Autonomy’s extensive US operations and customer base including the US government, it’s likely Deloitte’s US audit firm supported the UK firm with the Autonomy audit. Email requests for comment from HP and Deloitte were not returned. When it comes to irresistible consulting revenue growth, an audit firm’s “network of seamless service providers” bound by independence and objectivity regarding the audit of a multinational listed company stops at each border.
In the largest market for Deloitte’s consulting services, the United States, Deloitte Consulting’s US arm and Autonomy worked together prior to HP’s acquisition – and after – on one of the most high profile e-discovery and document management cases ever – the litigation over the BP Gulf oil spill. Autonomy, or rather a version of an Autonomy acquisition called Introspect, was used for the enormous BP Deepwater Horizon review, which employed more than 800 review attorneys at one point.
The BP Deepwater Horizon review started in the summer of 2010, after the explosion in April of that year. Deloitte was the case management consultant working between the client (BP), the review team and the hosting vendor (Autonomy). It is not clear if this was a joint project between Deloitte and Autonomy, with Deloitte acting as a systems integrator for the software, or if the parties contracted separately.
According to a source close to the BP engagement, the Autonomy software was a total disaster. The larger the review got, the worse the software performed. “Searches would hang up for long periods of time, document images would get out of synch with their corresponding coding records, the entire system would crash or have to be taken offline to be reset. You name it – when it came to software problems, Autonomy had them all at one time or another.”
According to the source, BP’s E-discovery manager made the selection because Autonomy was, supposedly, one of only two platforms potentially scalable to the enormous database they anticipated. But, without exception according to the source, everyone from the project manager to the average document review attorney was aggravated by the experience of trying to use the Autonomy product.
Previous business alliances by Deloitte member firms with Autonomy’s Interwoven and Verity products for system integration and reseller revenue may or may not have properly ceased in the UK when the firms were acquired and may have never ceased outside of the UK. The case studies and press releases are still on the Autonomy website now under the HP logo.
Deloitte has always been an important systems integration partner for HP. Deloitte has won numerous partner awards from HP over the years, including the most recent one, for the revenue growth enjoyed by both. As soon as HP bought Autonomy, Deloitte was free to publicly sign alliance agreements with Autonomy for all of its products. Deloitte member firms are hiring all over the world for the expertise to implement Autonomy’s software. Deloitte Consulting and its global member firms enjoy the highest possible Autonomy partner status, worth millions if not billions, as integrators of Autonomy products.
HP Autonomy: Deloitte’s Content Management practice includes one of the most experienced and highly regarded advisory and implementation service organizations in the world. HP Autonomy supports the information management for many of these projects.
Not a bad consolation prize for losing the Autonomy audit to Ernst & Young and for any litigation settlement they may, or may never, pay for Autonomy’s alleged fraud.
Albatross photo credit here.
Main page photo is a collage called What Goes Around, from the artist (c) Colette Copeland, at her site A Bird In The Hand.
Have you seen the Australian regulator inspection report?
I have a copy and read the headlines. Awful!
A couple of interesting things. 1. Smaller firms perform much worse than big 4 firms. You wonder if they would survive increased regulation. 2. Did you see recent articles in which there is no appetitie from directors and CFOs for regulatory change ( specifically mandatory firm rotation).
Deloitte would like to settle any claims by HP. The plaintiffs lawyers would jump at a $100 million payday but HP can’t be bought off that cheaply. The plaintiffs lawyers look at $100 million as found money. HP will look at is as too little compensation for a $10 billion loss. And, the CEO has put her reputation on the line here. It appears that Autonomy engaged in channel stuffing schemes with its resellers.
Somehow, the auditors got fooled even though it should be clear from Sunbeam, that channel stuffing is something that auditors need to look out for.