FDD Case Study for Interview: HP & Autonomy Fraud

If you are preparing for a Financial Due Diligence (FDD) interview, chances are very high that you will be asked about a real-life fraud case. Among all global case studies, the HP–Autonomy fraud is one of the most frequently discussed examples.
For a CA student, commerce graduate, or working professional in India, this case is extremely important because it connects accounting basics, financial analysis, revenue recognition, and red flags—all core areas tested in FDD interviews.
In this blog, we will understand the HP & Autonomy fraud case step by step, in simple language, without heavy jargon, exactly the way an interviewer expects you to explain.

Why HP–Autonomy Case Study Is Important for FDD Interviews

Before jumping into the case, let’s understand why interviewers love this case:

• It involves financial misrepresentation, not just operational issues
• It shows failure of financial due diligence
• It tests understanding of:
• Revenue recognition
• Quality of earnings
• One-time vs recurring revenue
• Aggressive accounting practices
• It is a classic example of what can go wrong if FDD is weak

Many FDD aspirants realise that understanding such cases in a structured manner—covering revenue quality, deal risks, and due diligence failures—is what differentiates interview-ready candidates, which is why focused learning paths like Master Blaster of Financial Due Diligence often prove helpful.

What Was Autonomy and Why Did HP Want It?

Let's start from the beginning. Autonomy was a UK-based software company founded by Mike Lynch. They made software that helped companies search and organize their data—think of it like a super-powered search engine for businesses.
On paper, Autonomy looked fantastic. Their revenue was growing, profits looked healthy, and they were audited by Deloitte, one of the Big Four accounting firms.
HP, the American tech giant (yes, the laptop and printer company), wanted to expand its software business. Their CEO at the time, Léo Apotheker, believed buying Autonomy would transform HP into a serious software player.

The Fraud: How Autonomy Inflated Its Numbers

After the acquisition, things started falling apart quickly. A whistleblower inside Autonomy raised red flags. When HP investigated, they discovered several fraudulent accounting practices:

1. Hardware Dressed as Software
Autonomy claimed to be a "pure software company." Software companies get higher valuations because software has better profit margins than hardware. 
But here's what they were actually doing: they were buying computer hardware (like servers and storage devices) cheaply, then reselling them at low margins or even losses, and recording these sales as "software revenue."
Think of it like this: Imagine you run a tuition centre (high-profit business), but to inflate your revenue, you also start selling notebooks and pens at cost price and show all of it as "tuition fees." Your business looks bigger, but your actual profits are much lower than they appear.

👉 In FDD terms, this is a quality of revenue issue.

2. Round-Trip Transactions
This was clever and sneaky. Autonomy would sell software to a reseller, record it as revenue immediately, but then quietly give money back to the same reseller through "marketing agreements."
It's like selling your friend a phone for ₹50,000, recording the sale, but then giving him ₹40,000 back as a "favor"—you haven't really made ₹50,000, but your books show that you did.

👉 This misled HP about future sustainability of earnings.

3. Aggressive Revenue Recognition
Under UK accounting rules (IFRS), companies have more flexibility in recognizing revenue compared to US rules (GAAP). Autonomy exploited these gray areas to book revenue earlier than they should have. They would recognize revenue from long-term contracts upfront rather than spreading it over time.
These practices systematically inflated Autonomy's revenue by 12-15% annually from 2009 to 2011. The court later called it "fraud on a grand scale."

👉 This violates basic revenue recognition principles, something every CA student studies.

Cases like Autonomy highlight that spotting manipulation requires more than textbook accounting; developing a forensic mindset—questioning intent, incentives, and transaction substance—is a skill many professionals consciously build through exposure to Forensic Accounting and Investigation concepts.

HP's Due Diligence Disaster

Here's where it gets really interesting for us as future financial due diligence professionals. HP wasn't some small company buying their first business. They were a massive corporation with plenty of resources. So what went wrong?

The Six-Hour Due Diligence
Mike Lynch's lawyers claimed that HP executives spent just six hours in conference calls with Autonomy's team for due diligence. Six hours! For an $11 billion deal! That's like a bank approving a ₹50 lakh home loan after a 10-minute phone call.

The CFO Who Never Read the Report
This is almost unbelievable: HP's CFO, Cathie Lesjak, admitted in court that she received KPMG's preliminary due diligence report but never read it. Even more shocking—no further due diligence was done after that report. This wasn't an ₹11 lakh decision; it was ₹92,000 crores!

Warning Signs Ignored
Multiple people raised concerns:

• HP's own CFO vocally opposed the acquisition
• Financial analysts warned that Autonomy was overvalued
• Industry experts said Autonomy's technology was outdated and faced heavy competition
• The purchase price was unusually high compared to similar software companies

What Should Have Been Done: Financial Due Diligence Basics

Let me break down what proper financial due diligence looks like, using simple examples:

1. Analyze Revenue Quality
Don't just look at the revenue number—understand where it's coming from. Ask questions like:

• Who are the major customers? (If one customer gives 60% of revenue, that's risky)
• What products generate the most revenue?
• Are revenues from one-time sales or recurring contracts?
• How is revenue being recognized—immediately or over time?

2. Verify with Third Parties
HP should have directly contacted Autonomy's major customers and resellers. When you verify independently, you often discover discrepancies. If HP had spoken to the resellers involved in those "round-trip" transactions, they might have uncovered the marketing agreements that were used to funnel money back.

3. Test Transactions, Don't Just Sample
Auditors typically check a sample of transactions. But for a major acquisition, you need to go deeper. The court ruling specifically mentioned that transaction-level testing of revenue recognition was crucial. Instead of checking 50 transactions out of 5,000, examine all high-value transactions and the relationships behind them.

4. Don't Rely Solely on Audited Statements
Many people think, "Deloitte audited it, so it must be fine." Wrong. Auditors provide opinions on financial statements—they're not specifically looking for fraud in an M&A context. Autonomy's accounts received clean audit opinions despite material misstatements. Your job in due diligence is to be more skeptical and investigative than an auditor.

This is where a strong grounding in audit fundamentals matters, because professionals who truly understand how audits work—something refined through deep exposure to Statutory Audit—are better equipped to challenge management explanations during due diligence.

5. Understand Accounting Differences
Autonomy used UK accounting standards (IFRS) while HP followed US standards (GAAP). These differences matter. IFRS allows more judgment and flexibility, which creates opportunities for aggressive accounting. When buying a company from a different country, always understand how accounting differences might inflate or deflate the numbers.

Learnings for Indian FDD Students & FDD Professionals

You might think, "This happened in the US and UK—does it matter for India?" Absolutely!
Indian companies are increasingly involved in cross-border M&A. Remember when Tata bought Jaguar Land Rover or when Flipkart was acquired by Walmart? These deals involved massive due diligence. As India's economy grows, more Indian companies will acquire foreign firms and vice versa.
Additionally, India follows Ind AS (Indian Accounting Standards), which is converged with IFRS. Understanding how these standards differ from US GAAP is crucial if you work on international deals.
The HP–Autonomy case is highly relevant for Indian CA students and commerce professionals aiming to work in:

• Big 4 Financial Due Diligence teams
• Transaction advisory services
• M&A and investment support roles

How This Case Is Asked in FDD Interviews

Interviewers often use this case to test your conceptual clarity and thinking approach, not your memory.
Common questions include:

• “Explain the HP–Autonomy fraud briefly”
• “What went wrong during financial due diligence?”
• “What red flags would you have identified?”
• “How would you avoid such a situation in future deals?”

How You Should Structure Your Interview Answer
To answer confidently, follow a clear and logical structure:
Start with the background of the deal, explaining why the acquisition happened.
Then explain what Autonomy showed in its financial statements.
After that, discuss the actual accounting issues and misrepresentation.
Next, highlight where financial due diligence failed.
Finally, conclude with key learnings and red flags.
This structured approach shows maturity and deal understanding, which interviewers highly value.

Final Thoughts

The HP-Autonomy case isn't just a story about corporate fraud—it's a masterclass in what happens when financial due diligence goes wrong. For you as a future CA, finance professional, or due diligence specialist, this case should be your reminder to always:

• Be thorough, not just fast
• Question assumptions, especially during exciting deals
• Verify independently, don't just trust audit reports
• Understand the business, not just the numbers
• Have the courage to raise red flags

Reference Links 

All About Financial Due Diligence (FDD): A Complete Guide
Financial Due Diligence Terminology Explained
Financial Due Diligence Interview Questions Explained

Frequently Asked Questions (FAQs) 

1. Why is the HP–Autonomy fraud case important for Financial Due Diligence interviews?
The HP–Autonomy case is important because it highlights failures in revenue recognition, quality of earnings analysis, and due diligence procedures. Interviewers use this case to test a candidate’s ability to identify red flags and think like an FDD professional.

2. What were the major accounting red flags in the HP–Autonomy fraud?
Key red flags included treating low-margin hardware sales as software revenue, aggressive revenue recognition, round-trip transactions, and reliance on one-time deals. These issues inflated profits and misled HP during the acquisition. 

3. How should a CA student explain the HP–Autonomy case in an interview?
A CA student should explain the deal background, what Autonomy reported, the actual accounting manipulation, where financial due diligence failed, and the key learnings. Clear structure, simple language, and logical thinking matter more than technical jargon.