EXCLUSIVE: A Former Autonomy Salesperson Says This Is How The Creative Accounting Was Done

You know how HP said it uncovered $5 billion worth of allegedly fraudulent revenue at Autonomy?

One thing HP has accused Autonomy of doing is booking software-as-a-service contracts as software licensing deals.

Autonomy has denied all allegations and the Department of Justice is now investigating. While we wait for information on that, the world is trying to figure out what this alleged "fraud" is really all about.

How would the mechanics of this type of accounting work?

A former Autonomy salesperson named Virginia Briody says she's seen it happen, firsthand.

She alleges that, prior to HP's acquisition, Autonomy executives massaged a SaaS deal into a big software licensing deal so they could recognize revenue up front, and show more growth than what the deal really was, a monthly agreement spanning four years. She says she has evidence – emails and documents.

Equally interesting is that a day after HP accused Autonomy of cooking the books, it used the testimony of Autonomy's former vice president of finance in court to defend Autonomy's accounting practices in this deal.

Her tale is pretty interesting.

But, before we get too far into it, readers should know that Briody is not an unbiased witness. She's been in a legal battle with HP over compensation since April 2012. She says HP owes her nearly $200,000.

Also, representatives of both HP and of former Autonomy CEO Mike Lynch challenge much of what Briody has to say. They deny wrongdoing with this deal and say she's upset that the most recent ruling in her legal battle with HP went against her (linked).

With those caveats in mind, let's get to Briody's story.

It all started when Briody was working as a salesperson for another software company, CA.

She had closed a four-year $1.22 million hosting/software-as-a-service deal with a customer, Pioneer Investments, and was paid her full commission, over $100,000, she says.

Autonomy bought the software unit from CA on June 9, 2010, and Briody became an employee of Autonomy and Autonomy inherited the Pioneer contract.

But there was an issue. Autonomy didn't acquire all the pieces called for in the original contract, Briody says. It didn't have a partnership with the hosting facility and it didn't gain from CA a critical piece of compliance software the customer needed, she says. Autonomy needed to find substitutions or Pioneer would cancel the contract, Briody says.

So in the fall of 2010, she signed a new deal with Pioneer and walked away with a four-year, $1.859 million contract of which Autonomy execs considered $1.8 million as new revenue, she says.

According to Briody, the new deal was the same as the old one in that the customer would not install any software and agreed to make ongoing payments (see email embedded below).

That's when things got weird, she describes.

She says Autonomy execs wanted to change the terms from a mostly hosting deal to a mostly software license deal.

Why would Autonomy execs want to do this?

Briody says a software licensing contract would allow Autonomy to recognize most of the deal's revenue up front. The accounting, legal and finance departments created the contract, she said, and "I did not have a choice, Autonomy made me do the contract this way," she told Business Insider.

Briody knows Autonomy executives were working on a way to recognize more of the $1.9 million because she obtained emails from them and used them as evidence in her wage claim suit with the New Hampshire Department of Labor.

Here is one of them, from Matt Stephan, in Autonomy's finance department:

From: Matt Stephan [mailto:matt.stephan@autonomy.com]
Sent: Friday, September 10, 2010 4:56 PM
To: Mike Sullivan
Cc: Steve Chamberlain - Autonomy; 'James Crumbacher'
Subject: Pioneer
Importance: High

Mike – need your help. As it currently stands, this deal has two problems which make recognizing licence revenue upfront very problematic.

First is the payment terms which extend over the whole term of the licence, suggesting it’s a 3 year service we’re providing and not a software licence. Second is the fact that we’re combining the licence and hosted fees into a single number and then calling out in the contract a high hosting fee of $1.50/GB/mo for exceeding the 22TB. When calculating a carve out, we would need to start with this contracted rate and could only lower it to our VS OE with a compelling argument about why the $1.50 doesn’t apply.

I appreciate the customer’s demands are driving the current structure but to get rev rec on the licence we need to get the following:

1) Substantial payment upfront and following payments not dragging out over whole term

2) Separate monthly hosting fees

Give me a shout if you need more info.

Thanks

Matt

Ultimately Autonomy execs revised the contract to spell out over $1 million of software licenses sold, Briody says, showing us another email (embedded below).

To make the deal with Pioneer really look like a software deal, Briody says Autonomy even sent the customer "product code keys" which are used to unlock software. Briody says this confused the customer, since the customer wasn't installing any software. Briody showed us an email from the customer asking about the keys. (Again, representatives from HP and former Autonomy CEO Mike Lynch say that the customer asked for and bought the software.)

Eventually, Briody says she re-did the deal as her Autonomy bosses asked.

Then, she says, they fired her.

Briody filed a wage claim with the Department of Labor in April, 2012. The DOL found in her favor in July 2012, and said she was due $196,000 including full commission on the second Pioneer contract and damages. In August 2012, HP, which by then owned Autonomy, appealed the ruling. This time, the court ruled in HP's favor. (Here's a link to DOL document.)

Importantly, Briody's actual legal claim against HP has nothing to do with whether or not Autonomy committed fraud on this deal. Her claim is that HP, because it owns Autonomy, owes her a commission on the second deal (even though CA had already paid her a commission for the first deal) based on her employment contract with Autonomy and conversations made to her by her supervisors.

HP says that the only reason Autonomy had to redo the deal was that Briody didn't get the customer, Pioneer, the deal it wanted in the first place, and that Pioneer had to ask for it to be redone. To this, Briody says that the deal was fine until Autonomy acquired it from CA, but didn't also buy from CA all the software and services that was part of it.

At this point, it's a he-said/she-said legal mess – with HP getting the latest result from the courts and another appeal in the works.

The whole saga is, interesting, however, in that it is a look at how, as Briody alleges, Autonomy might have structured a SaaS deal to look more like a licensing deal primarily by

…writing a contract that denotes a large portion of the fees as a software license

…shipping the license keys even if they will not be used

... invoicing the customer for a big chunk of money up front (much to the surprise of this customer, Briody contends)

…and structuring monthly payment terms on a single invoice (see email embedded below).

We asked HP for comment and HP politely declined. A source close to the company told us that "this transaction was not one that surfaced during the investigation" by HP into Autonomy's accounting.

A spokesperson for Autonomy's founder and former CEO Mike Lynch said that Lynch was not involved in the deal. Since this contract was over $100,000, it was reviewed by an auditor and the "revenue would have been recognized in accordance with IFRS, as applied by the auditor," the spokesperson said.

This is the same response that Lynch has made to HP's accusations.

As we previously reported, in addition to HP's accusations about hosting deals, HP has also accused Autonomy execs of improper accounting on hardware sales and in how it handled accounts related to its reseller channel.

Here is the email that shows how executives discussed restructuring the Pioneer hosting contract into a software licensing deal (click to enlarge image):

Here is a second email that shows how Autonomy execs structured monthly payment terms.

Here is a link to the original DOL document finding in Briody's favor that summarizes how the customer's contract was negotiated.