* Alleges 'serious accounting improprieties'
* Takes charge for Autonomy software purchase
* Refers matter to SEC, UK Serious Fraud Office
* Former Autonomy CEO calls allegations 'false'
Nov 20 (Reuters) - Hewlett-Packard stunned Wall Street by alleging a massive accounting scandal at its British software unit Autonomy that will cost the company the majority of $8.8 billion in charges.
It was the latest in a string of reversals that have renewed questions about the basic competence of the storied company's board and senior managers.
HP said on Tuesday it discovered "serious accounting improprieties" and "a willful effort by Autonomy to mislead shareholders," after a whistleblower came forward following the ouster of Autonomy's then-chief executive, Mike Lynch, in May.
The charge follows a nearly $11 billion writedown last quarter for the company's EDS services division.
The technology company has been roiled in the past few years by a revolving door of CEOs, overall management turnover and challenges in its core personal computer and printer businesses.
HP's stock slid to a 10-year low, dropping 12 percent to $11.71 in regular trading on Tuesday. Shares are down nearly 50 percent year to date.
Lynch "flatly rejected" HP's allegations and said he was "shocked" but confident he would be absolved of any wrongdoing.
He had not been notified by HP about the allegation before it was made public, nor had he been contacted by any authorities, Lynch said in an interview with Reuters.
HP took $8.8 billion in charges in the quarter, with $5 billion tied to the problems at Autonomy. The rest of the charge related to the "recent trading value of HP stock and headwinds against anticipated synergies and marketplace performance," HP said.
HP said it has referred the matter to the U.S. Securities and Exchange Commission's enforcement division and the UK's Serious Fraud Office for civil and criminal investigation. It said it would take legal action to recoup "what we can for our shareholders."
Both agencies declined to comment.
HP Chief Executive Meg Whitman, who voted for the deal while she was on HP's board, said the investigation of Autonomy's finances - both external and internal - will take multiple years as it makes it way through the courts in both countries.
"Most of the board was here and voted for this deal, and we feel terribly about that," said Whitman on a call with analysts. "The board relied on audited financials, audited by Deloitte. Not Brand X accounting firm, but Deloitte," she said, adding that KPMG was hired to audit Deloitte.
"Neither of them saw what we now see after someone came forward to point us in the right direction," Whitman said.
INFLATED SALES, REVENUE
HP alleged that Autonomy's former management inflated revenue and gross margins to mislead potential buyers. It said Autonomy executives mischaracterized revenue from low-end hardware sales as software sales and booked some licensing deals with partners as revenue, even though no customer bought products.
HP said Autonomy claimed its gross margins were in the 40 percent to 45 percent range while realistically they were in the 28 percent to 30 percent range.
Moreover, Autonomy always represented itself as a software firm but 10 percent to 15 percent of its revenue came from money-losing sales of low-end hardware, HP said.
The company also claimed that Autonomy was booking licensing revenue upfront before deals closed.
HP has embarked on an internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy's historical financial results, under HP General Counsel John Schultz after the whistleblower came forward in May.
Schultz said since the accounting troubles occurred prior to the acquisition of Autonomy, it took a long time before HP was in a position to make the news public.
"Not surprisingly, Autonomy did not have sitting on a shelf somewhere a set of well-maintained books that would walk you through what was actually happening from a financial perspective inside the company," he said. "Indeed critical documents were missing from the obvious places, and it required that we look in every nook and cranny."
Whitman said her predecessor, Leo Apotheker and the former chief strategy officer, Shane Robison, were the key people behind the Autonomy acquisition.
Apotheker bought Autonomy to diversify HP's business and beef up its portfolio to provide one-stop shopping for corporations. The $11 billion acquisition of Autonomy - heavily criticized by investors as too costly - was a key part of the plan to transform HP.
Apotheker was ousted as CEO in September 2011 after just 11 months on the job and Robison left soon after.
In a statement, Apotheker said he was "stunned and disappointed" by the revelations and offered to make himself available to HP and the authorities to get to the bottom of the matter.
Whitman on Tuesday stood by Autonomy's technology and products despite the allegations, saying it will be the growth engine for HP. The former California gubernatorial candidate has been trying to move beyond some of HP's past controversies, which includes the ouster of the past two CEOs, a haphazard product strategy and a plan to sell its PC unit that was later dropped.
HP has been running Autonomy since the acquisition closed in October 2011, but it didn't find the accounting problems on its own. The company investigated only after a senior Autonomy executive came forward to detail the financial metrics surrounding Autonomy.
Advisers working on behalf of Autonomy included Qatalyst Partners, the investment bank run by technology investment banker Frank Quattrone; UBS; Goldman Sachs; Citigroup; JPMorgan Chase, and Bank of America. Perella Weinberg Partners and Barclays Capital advised for HP.
Law firms for Autonomy were Slaughter & May and Morgan Lewis. The firms for HP included Gibson, Dunn & Crutcher; Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and Skadden, Arps, Slate, Meagher & Flom.
Robert Enderle, a tech analyst at the Enderle Group, said he has never seen such a potential misrepresentation of financials.
"You have to rely on what the firm gives you during due diligence and I've never seen a misstatement at this level," Enderle said.
If the charges are true, it could result in a massive punitive damages award for HP, Enderle said.
Other analysts hoped it was the end of the bad news for HP.
"This kind of feels like the last of the bad news," Forrester analyst Frank Gillett said.
The Autonomy allegations and announcement of the charge coincided with the reporting of a fiscal fourth-quarter loss for HP.
HP said net revenue fell 6.7 percent to $29.96 billion for the quarter, ended Oct. 31, from $32.12 billion a year earlier. Analysts, on average, expected $30.43 billion, according to Thomson Reuters I/B/E/S.
Revenue from all of its main business units declined, with the personal computer division recording the steepest drop, at 14 percent while revenue from printing fell 5 percent.
HP reported a quarterly net loss of $6.85 billion, or $3.49 a share, versus a profit of $239 million, or 12 cents, a year earlier.
The sprawling company, which employs more than 300,000 people globally, is undergoing a restructuring aimed at focusing on enterprise services in the mold of International Business Machines Corp.
"To put it bluntly ... this story has been an unmitigated train wreck, and it seems every time management speaks to the Street, there is new negative incremental information forthcoming," said ISI Group analyst Brian Marshall.