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Advisory group says raised Autonomy auditor concerns

By Paul Sandle

LONDON (Reuters) - Shareholder group PIRC said on Thursday it had warned that auditors Deloitte did too much non-audit work for Autonomy to be sufficiently independent from the software firm that Hewlett Packard bought last year and now accuses of inflating its accounts.

HP bought the British company for $11.1 billion last year, a price many analysts considered more than it was worth, and announced on Tuesday that it was writing off about $5 billion due to "serious accounting improprieties" that inflated the unit's numbers before the deal.

Autonomy has denied any wrongdoing, but the software group's accounts are now at the center of a bitter dispute between the firm's founder, Mike Lynch, and HP.

"Prior to its takeover, Autonomy raised a number of red flags on the governance front," said PIRC, which advises funds investing 1.5 trillion pounds ($2.4 trillion).

"In PIRC's view it lacked proper independent representation, which led us to oppose the election of numerous directors over years. Its auditor also raked in significant non-audit fees, which we found problematic."

PIRC said the sums Autonomy paid the accountancy firm for other services such as legislation, tax and corporate finance advice made up more than 25 percent of the total the group paid Deloitte, a level PIRC considers significant in its assessment of whether an auditor is properly independent from its client.

Autonomy paid Deloitte $2.7 million in 2010, with $1.5 million described as total audit fees and the rest described as non-audit fees.

PIRC's managing director Alan MacDougall told Reuters that paying unrelated fees to auditors undermined their independence, though it was fairly common practice, with about 40 companies in the FTSE 350 crossing its threshold.

"We conducted our audit work in full compliance with regulation and professional standards," Deloitte said in a statement on Wednesday, having "categorically denied" it had any knowledge of any improprieties or misrepresentations in Autonomy's financial statements.

The Institute of Chartered Accountants in England and Wales, of which Deloitte is a member, says on its website that ethical guidance in the UK does not impose limits on the types of income an auditor can generate from a client.

It says independence is ensured by stipulating "that income from any one client, for whatever service, is kept to no more than a certain proportion of that firm's overall practice income".

"We are unable to discuss our audit work further due to client confidentiality. We will cooperate with the relevant authorities with any investigations into these allegations," Deloitte said.

The firm also said it was not engaged by HP or Autonomy to provide any due diligence in relation to the acquisition. HP has said it relied on Deloitte for vetting Autonomy's financials.

A spokesman for Deloitte said the trend at Autonomy in terms of audit fees relative to non-audit fees had been rising.

(Reporting by Paul Sandle; Editing by Will Waterman)

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