Good morning. Earlier this week, I wrote about how Sushovan Hussain, the former CFO of Autonomy, a software company founded by the late British tech entrepreneur Mike Lynch, cooked the books and landed in prison for five years and how, in July, he was banned from accounting until 2038.
About a year after HP acquired Autonomy in 2011 for $11.1 billion, the tech giant accused Autonomy of accounting fraud. Lynch was acquitted and Hussain was found guilty of 16 counts of fraud in 2018. Back-dated contracts, round-trips, and channel stuffing are at least three of the fraudulent accounting practices. But what do these practices entail? I talked with experts to find out more.
John M. Veitch, dean for the School of Business and Management at Notre Dame de Namur University, told me that round-tripping is a sales scheme. Essentially, one company sells an asset to another company, while agreeing to buy it back for about the same price.
“For instance, say a company may be missing its revenue targets by $1 million for Q4 2023,” Veitch explained. “Using round-tripping it would send out $1 million of product to distributors or retailers with a guarantee to buy back the product for $1.1 million in the next accounting period. The firm improperly recognizes the $1 million as revenue for Q4 2023, even though it was not a real sale, and will have additional expenses of $1.1 million in the next period.”
In Autonomy’s case the round-tripping “appears to be a little more complex,” Veitch said. What was sold was hardware, but it booked these sales as software contracts instead, he said. “The rationale was that hardware sales have low-profit margins, while software contracts tend to have much higher profit margins,” Veitch explained. So, HP would value software sales more highly than hardware sales.
“I can’t find details but I imagine that Autonomy bought the hardware back in a later period as hardware, not as a software contract,” he said. “This is the only ‘sophisticated’ piece to the accounting fraud I can find in the public record.”
In general, the boundaries and ethical guidelines for accounting are always set by the company’s board, Shane Goodwin, associate dean, and a finance professor at the Cox School of Business at Southern Methodist University, told me. Goodwin also serves as chair of the audit committees on the boards of Principal Private Credit Fund and Principal Real Asset Fund.
Boards collaborate with leadership, starting with the CEO, then the CFO and audit teams, he said. “We also work closely with the outside auditors to make sure we’re understanding everything that’s going on with the company from an audit perspective,” Goodwin said.
You can read more about my conversation with Veitch and Goodwin regarding Hussain’s fraudulent accounting practices here.
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna
Leaderboard
Yao Liu is resigning from her position as CFO of Tuya (NYSE: TUYA), a Chinese cloud software company, effective Sept. 16. Liu made the decision to devote more time to her personal endeavors, the company said. Cofounder and director Yi Yang will take on the additional role of CFO.
Jonathan Hall was appointed CFO of Shearwater Group (AIM: SWG), a British cybersecurity and software company, effective Wednesday. He will succeed Adam Hurst, who will remain at the company for a short transition period. Hall has previously served as a finance director at media company Gfinity and English rugby team Saracens.
Big Deal
Consumer apparel: trading down is the new dressing up is a new report from the Bank of America Institute. Discount retail spending per household has been growing faster than overall retail spending since July 2022, according to Bank of America credit card data.
The shift is likely due to inflation, BofA said. Even though apparel prices have increased just 5% over the last five years, compared to a 30% increase for groceries, the report said the cost-of-living surge has pushed consumers, particularly Gen Z and Millennials, to cut spending on discretionary goods.
The credit card data suggests the market share for value apparel increased nearly four percentage points for both groups in the past year. The trend has been more pronounced among lower- and middle-income consumers. Value apparel market share was up 10% for those demographics, more than twice the rate of growth for higher-income customers.
Going deeper
Automation is changing corporate structures and centralizing decision-making at the top levels, according to recent research from Pinar Yildirim, a marketing and economics professor at the University of Pennsylvania’s Wharton School, along with Mustafa Dogan and Alexandre Jacquillat. The authors found organizations characterized by top-down decision making are more likely to automate tasks within divisions that face uncertainty, reducing reliance on mid-level managers, while more decentralized firms tended to allocate automation resources to more routine tasks. The paper suggests this phenomenon could increase the innovation and communication advantages decentralized companies possess over their more centralized peers.
Overheard
“In recent weeks oil prices have downplayed geopolitical risks because there has been no major disruption of supply. That could change.”
—Phil Flynn, a senior account executive at Price Futures Group and Fox Business News contributor, told the Financial Times after political wrangling between Libya’s two governments caused oil prices to spike.
