But the eternal question asked whenever a fraud surfaces — “Where were the auditors?” — does have an answer in this case.

They were everywhere.

They were consulting. They were advising, according to one account, on strategies for “optimizing” revenue. They were investigating whether books were cooked, and they were signing off on audits approving the books that are now alleged to have been cooked. They were offering advice on executive pay. There are four major accounting firms, and each has some involvement.

Herewith a brief summary of the Autonomy dispute:

Hewlett-Packard, a computer maker that in recent years has gone from one stumble to another, bought Autonomy last year. The British company’s accounting had long been the subject of harsh criticism from some short-sellers, but H.P. evidently did not care. The $11 billion deal closed in October 2011.

Last week, H.P. said Autonomy had been cooking its books in a variety of ways. Mike Lynch, who founded Autonomy and was fired by H.P. this year, says the company’s books were fine. If the company has lost value, he says, it is because of H.P.’s mismanagement.

Autonomy was audited by the British arm of Deloitte. H.P., which is audited by Ernst Young, hired KPMG to perform due diligence in connection with the acquisition — due diligence that presumably found no big problems with the books.

That covered three of the four big firms, so it should be no surprise that the final one, PricewaterhouseCoopers, was brought in to conduct a forensic investigation after an unnamed whistle-blower told H.P. that the books were not kosher. H.P. says the PWC investigation found “serious accounting improprieties, misrepresentation and disclosure failures.”

That would seem to make the Big Four tally two for Autonomy and two for H.P., or at least it would when Ernst approves H.P.’s annual report including the write-down.

But KPMG wants it known that it “was not engaged by H.P. to perform any audit work on this matter. The firm’s only role was to provide a limited set of non-audit-related services.” KPMG won’t say what those services were, but states, “We can say with confidence that we acted responsibly and with integrity.’

Deloitte did much more for Autonomy than audit its books, perhaps taking advantage of British rules, which are more relaxed about potential conflicts of interest than are American regulations enacted a decade ago in the Sarbanes-Oxley law. In 2010, states the company’s annual report, 44 percent of the money paid to Deloitte by Autonomy was for nonaudit services. Some of the money went for “advice in relation to remuneration,” which presumably means consultations on how much executives should be paid.

The consulting arms of the Big Four also have relationships that can be complicated. At an auditing conference this week at New York University, Francine McKenna of Forbes.com noted that Deloitte was officially a platinum-level “strategic alliance technology implementation partner” of H.P. and said she had learned of “at least two large client engagements where Autonomy and Deloitte Consulting worked together before the acquisition.” A Deloitte spokeswoman did not comment on that report.

To an outsider, making sense of this brouhaha is not easy. In a normal accounting scandal, if there is such a thing, the company restates its earnings and details how revenue was inflated or costs hidden. That has not happened here, and it may never happen. There is not even an accusation of how much Autonomy inflated its profits, but if there were, it would be a very small fraction of the $8.8 billion write-off that H.P. took. Autonomy never reported earning $1 billion in a year.

That $8.8 billion represents a write-off of much of the good will that H.P. booked when it made the deal, based on the conclusion that Autonomy was not worth nearly as much as it had paid. It says more than $5 billion of that relates to the accounting irregularities, with the rest reflecting H.P.’s low stock price and “headwinds against anticipated synergies and marketplace performance,” whatever that might mean.

Some of the accounting accusations relate to how Autonomy booked expenses. The H.P. version is that the British company made sales of hardware — personal computers it bought and resold — look like sales of valuable software. It hid some costs as marketing expenses when they should have been reported as costs of goods sold.

All that, if true, would inflate operating profit margins and growth rates for the most important part of the business. But it would not change net earnings.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/30/business/auditors-clash-in-hp-deal-for-autonomy.html?partner=rss&emc=rss