Known as the “British Bill Gates,” Lynch was the founder and CEO of Autonomy. But after HP acquired the company in 2011 for $11.1 billion, HP accused Lynch and other company executives of falsifying financial statements. Lynch was acquitted in June, but his former chief financial officer, Sushovan Hussain, was previously sentenced to five years in prison and in July was banned from working as an accountant until 2038.

Hussain was found guilty of 16 counts of fraud in 2018. Backdated contracts, round trips and channel stuffing are at least three of the fraudulent accounting practices that landed him in prison for five years. But what do these practices involve?

The use of backdated contracts occurs when the perpetrator changes the date of a contract to make it appear as if the sale took place in an earlier accounting period, said John M. Veitch, dean of the School of Business and Management at Notre Dame de Namur University, Assets.

“For example, let’s say a company missed its fourth-quarter 2023 revenue targets by $1 million,” he explained. “It could take a $1 million purchase agreement signed on January 15, 2024, move the date to December 24, 2023, and then record that $1 million as revenue for the fourth quarter of 2023,” he said. Essentially, backdating a contract improperly pulls back revenue from a later period to an earlier period to inflate the earlier period’s revenue, Veitch said.

In the lawsuit, HP argued that Lynch and his allies — Autonomy’s former vice president of finance, Stephen Chamberlain, who was also acquitted, and Hussain — inflated Autonomy’s value before the sale through accounting tricks.

Channel stuffing, on the other hand, generally occurs when a company tries to inflate or artificially increase its sales numbers by releasing more products than it can sell to meet expectations, said Shane Goodwin, associate dean and finance professor at Southern Methodist University’s Cox School of Business. Assets“It is a manipulation of financial figures to reflect something that is not actually true,” he said.

In Autonomy’s case, “the round-tripping seems a little more complex,” Veitch said. Hardware was sold, but those sales were accounted for as software contracts instead, he said. “The rationale was that hardware sales have low margins, while software contracts tend to have much higher margins,” Veitch explained. Therefore, HP would value software sales higher than hardware sales.

“I can’t find any details, but I assume Autonomy later repurchased the hardware as hardware rather than a software contract,” he said. “This is the only ‘sophisticated’ piece of accounting fraud I can find in the public filings.”

Ethical guidelines

In general, accounting boundaries and ethical guidelines are always set by the company’s board of directors, said Goodwin, who also serves as chairman of the audit committees on the boards of Principal Private Credit Fund and Principal Real Asset Fund.

The boards work with the company’s leadership, starting with the CEO, then the CFO and the audit teams, he said. “We also work closely with the external auditors to make sure we understand everything that’s going on in the company from an audit perspective,” Goodwin said.

“In my experience, the widespread use of channel stuffing, retroactive contracts and round-tripping within a company is almost always approved by those at or near the top of the company because of the pressure to meet targets and reap the benefits that come with them, such as bonuses or maximizing share value,” Veitch said.

And in Autonomy’s case, it’s questionable whether the company actually wanted to prevent the fraudulent practices, Veitch said. “I would just note that during this time, HP wanted to buy Autonomy, and the higher Autonomy’s revenue and revenue growth, the higher the price HP would pay,” he said. “Members of Autonomy’s management team undoubtedly owned shares in Autonomy and were hoping to get the highest price possible.” It appears the management team’s incentives “were not geared toward preventing this at all,” he said.

As for Lynch, the prosecution argued he had knowledge and understanding of the fraud being committed, Veitch explained. But he argued he was not involved in accounting and contract matters (he claimed he could not understand the financial projection spreadsheets), only marketing and technical matters. When Lynch was acquitted of the fraud charges in June, “the jury did not find the prosecution’s argument persuasive,” Veitch said.

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