What Will Come of This Justice Department Probe?

When Hewlett-Packard (NYSE:HPQ) acquired the enterprise software company Autonomy in October 2011 for $11 billion, the company’s Chief Executive at the time, Leo Apotheker, saw the takeover as an opportunity to transition from the low-margins and declining sales of its computer hardware business to the more profitable software business. But the purchase of Autonomy brought only a $5 billion accounting writedown in H-P’s most recent quarter, accusations of accounting improprieties by Autonomy’s former management, and investigations by the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and Britain’s Serious Fraud Office.

As Reuters reported, a document filed by Hewlett-Packard late Thursday revealed that the Justice Department had begun investigating Autonomy’s accounting.

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How has Autonomy founder Mike Lynch defended the company’s accounting?

Once H-P’s writedown was made public in the company’s fourth-quarter results on November 20, the board claimed that Autonomy had misled Hewlett-Packard. “In hindsight, we shouldn’t have done the Autonomy deal at such a high price,” company Chairman Ray Lane told Reuters in a November email. “We were lied to and as a result, we got it wrong.”

In response to Hewlett-Packard’s accusations of fraud, Lynch wrote an open letter to the company’s board asking one pertinent question:

“In order to justify a $5 billion accounting write down, a significant amount of revenue must be involved. Please explain how such issues could possibly have gone undetected during the extensive acquisition due diligence process and HP’s financial oversight of Autonomy for a year from acquisition until October 2012.”

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