Caveat emptor

The accusations of suspect accounting at the British technology firm Autonomy before its 2011 acquisition by Hewlett-Packard have taken a fresh turn.

Meg Whitman, the chief executive who took over as the acquisition was being completed, blamed a "wilful effort" to inflate the company's figures, and that they "severely impacted HP management's ability to fairly value Autonomy at the time of the deal".

HP has now filed papers in court accusing both Michael Lynch the founder and former CEO of Autonomy and Sushovan Hussain former CFO of fraud.

HP bought Autonomy in 2011 for £6.6 billion and had to to write down £5.2billion of the company’s value a year later. 

Previously Deloitte who audited Autonomy’s accounts said “it accepted decisions of management” to recognise hardware sales in its accounts as “sales and marketing”.

Hewlett-Packard says that this was a mechanism of covering up hardware sales and that Autonomy booked revenues before they were received and used a number of acquisitions to inflate the company’s value before the turnover.

Currently the FBI and the Serious Fraud Office continue to trawl through some 75,000 emails.

Meanwhile the US$ 5 billion battle continues, begging the questions that during the due diligence process how many Auditors examined the validity of the reported accounts.

This is not an isolated event, think of the Japanese camera giant Olympus, the company admitted to hiding losses on securities investments for decades.

To conduct this $1.7 billion fraud Olympus executives secretly liquidated hundreds of millions of dollars of Olympus investments, and then lied to auditors by certifying that the investments still existed.

Ultimately the validity of a company’s accounts reflects the integrity of the company which is being audited.

If the company’s results are misrepresented through fraud, deviousness or sheer incompetence then the fall-out will be disastrous.

 

Telling you what you want to hear

One recurring theme from the analysis of losses made in the financial sector is that the management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often the corporate culture is dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore.

Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on the management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

Unfortunately many managers duck the issue rather than risk receiving unpalatable truths.

Avoid becoming an unsecured creditor

 

From a supplier’s perspective the most important part of any transaction is to ensure prompt and satisfactory receipt of funds for goods or services provided.

When a company oversteps the mark by abusing agreed payment terms they are in fact using the seller’s tolerance as means of providing an unsecured overdraft.

It would seem absurd to exchange a promise from your buyer for prompt settlement conditional on your company providing the upfront funds enabling them to do so.

In reality by continuing to supply a persistent late paying account this is exactly what is happening.

It is a question of commercial judgment. In these present trading conditions business is hard won but if the transaction carries a disproportionate risk then it isn’t really worthwhile.

The time and effort spent chasing a recalcitrant account could be better spent elsewhere.

The crowds are baying for blood.

 

As the Bank of England mulls over the mechanisms to claw back bonus payments from bankers and the prospects of criminal charges for alleged financial wrong doing there is a growing sense that those perceived responsible for financial shenanigans should be held to account.

As the various banking disasters unfolded we heard how “mega profits” were being generated and that nobody thought that this seemed too good to be true.

When an individual or group of individuals are labelled “star traders” the culture of these financial institutions is such that it is virtually impossible for anyone to check or challenge them.

There are few prizes for killing the golden goose.

Even more ludicrous is the lack of independent controls which left many of the traders to self-police their own portfolio.

Whether by design or delusion what trader facing enormous losses is willingly going to face up to the reality of the situation?

The preferred course of action is to continue betting more heavily in a forlorn hope to recoup the losses. It is an all too familiar tale.

The regulatory authorities may pursue some of these irresponsible traders in an effort to appease those who think that the bankers “got away with it”.

In due course a few of them may end up going to prison but the vast majority will have nothing to fear.

In reality the really guilty parties are those who were operating at the very highest levels in the banking communities.

Whilst not directly responsible for the specific transactions they oversaw the deeply flawed system. Whether driven by greed for increased profits or fear of not keeping pace with their competitors they presided over the ultimate train crash whilst being rewarded handsomely.

 

Short termism a dangerous path

 

Former Institute of Directors boss Sir George Cox has produced a report citing that the pressure to deliver quick results to the potential detriment of the longer-term development of a company had "become an entrenched feature of the UK business environment".

He said almost three-fifths of the senior business leaders he had consulted believed short-term thinking was a major or a significant impediment to economic growth.

Sir George said: "Short-termism curtails ambition, inhibits long-term thinking and provides a disincentive to invest in research, new capabilities, products, training, recruitment and skills."

There is no doubt that the main reason which precipitated the financial meltdown was the slavish following of short terms goals which hitherto had been labelled “get rich quick” schemes but have been shown to be the very opposite.

The problem facing the business community now is as companies struggle with funding issues and the spectre of more corporate failures it becomes increasingly difficult to focus on long term objectives as opposed to satisfying the immediate requirements of the shareholders.

What’s in a name?

 

Following the financial crisis of 2008 there was much talk of a collective reigning in and return to the principles of sound business.


However memories are short and it is never long before the blurring starts again and risky practices again become more and more the norm.

There is now a concerted move afoot to rehabilitate the image of leverage. This was the mechanism which more than any other precipitated the disaster in the financial system.

Companies no longer speak of leveraged deals but are now taking on “sponsor finance”.

This re-branding has in-built danger as witnessed previously; complacency has resulted in the demise of numerous organisations.

In the words of Machiavelli “Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus the necessarily have the same results.”

Ignore the warning signs at your own peril

 

The hackneyed response from recalcitrant Debtors used to be that “the cheque is in the post”. This generally bought some time as generally Suppliers met this response with a weary resignation.

Times have moved on and the latest mantra is “its set up for next week’s payment run”.

Basically the name of the game remains the same, buy some time - achieve a payment extension thereby effectively squeezing the supplier’s margin.

Obviously it is a difficult balancing act between keeping the customer happy and managing your own company’s cash-flow.

However, we are all operating in difficult times and it is vital to keep full control of receivables.

Delays in payment will impact on the bottom line; however the worst scenario is that neglecting to strictly monitor a failing company could result in a total write off.