SFO's Autonomy probe show importance of anti-fraud due diligence, says expert

In a document submitted to the US Securities and Exchange Commission (SEC), HP confirmed that the SFO launched its investigation last month.

"As a result of the findings of an ongoing investigation, HP has provided information to the UK Serious Fraud Office, the US Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy," HP said in its SEC filing.

"On November 21, 2012, representatives of the US Department of Justice advised HP that they had opened an investigation relating to Autonomy. On February 6, 2013, representatives of the UK Serious Fraud Office advised HP that they had also opened an investigation relating to Autonomy. HP is cooperating with the three investigating agencies," it added.

HP has previously claimed that it paid more money than it should have when it bought Autonomy in 2011 as a result of "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy". Dr Mike Lynch, Autonomy's former chief executive, has fervently denied the allegations and has called on HP to make "immediate and specific explanations for the allegations" it has made. HP acquired Autonomy in a reported £7 billion deal.

Anti-corruption law specialist Barry Vitou of Pinsent Masons, the law firm behind Out-Law.com, said that the news of the SFO's probe "underscores the importance of buyers doing their homework properly before they transact".

"In the race to complete deals the temptation can be to cut corners on mergers and acquisitions due diligence and keep costs down," Vitou said. "In our experience a tick box approach is a false economy though we have noticed an increasing commoditisation and a reluctance to pay for anti-fraud due diligence in recent years. The inevitable result is that less detailed anti fraud due diligence is done, if any is done at all."

"Considering the eye-watering regulatory penalties and the potential commercial damage that result from fraud, it is a surprise when little detailed due diligence work on fraud is carried out. If businesses want to avoid nasty surprises in the form of alleged or suspected criminal activity crawling out of the woodwork after the deal is done, proper anti-fraud due diligence needs to be done up front," he added.

Vitou said that the SFO had undertaken other high-profile investigations in recent times.

"The SFO probe highlights the increasing importance to corporates of criminal law enforcement and investigations," he said. "It is the latest in a line of new SFO probes that have been launched into corporates in the last eighteen months. As well as the Autonomy probe, there have been new investigations launched into banks over Libor, EADS and Rolls-Royce and a Hedge Fund. Corporates and executives would do well to remember that criminal law applies to them and take compliance seriously."

Last month UK accountancy watchdog the Financial Reporting Council announced that it had launched an investigation into the published accounts of Autonomy. Deloitte, which audited the accounts during the period covered by the FRC's investigation, has said that it had "no knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements" and that it had "conducted [its] audit work in full compliance with regulation and professional standards".

Previously, IT law specialist Iain Monaghan and forensic accountant Chris Wheeler, both of Pinsent Masons, told Out-Law.com that a review of accounts should form just part of firms' overall due diligence of prospective outsourcing arrangements, from both a buyer and suppliers' perspective.

"That the other party has healthy finances will be important, but other factors will also be taken into account," Monaghan said. "The customer will want to examine the supplier’s track record in cost reduction and innovation and in reliable service delivery: the supplier will want to investigate any assets, employees, and contracts it is likely to inherit so that it can assess the cost of providing the required services."

Wheeler added: "The financial statements can only ever provide some assurance that the historic performance as dictated by the accounting policies adopted by the company in their preparation was true and fair – in other words that the auditors were satisfied that the Directors had produced numbers and disclosure in accordance with the relevant accounting standards which was fairly stated within their view of what was material, and properly prepared in accordance with the Companies Act."