Software Startup Says Growth Was Fictitious, Blames CEO

Silicon Valley companies had been mercifully spared the bad publicity of accounting scandals -- until HPL Technologies announced at a press conference earlier this week that much of its growth was based on fictitious transactions.

The San Jose-based software company said it had uncovered massive accounting fraud that was apparently orchestrated by the company's founder and chief executive officer (CEO) who took the company public a year ago.

HPL's audit committee chairman estimates that at least $11 million of the $13.7 million reported as revenue in the quarter ended in March 2002 was based on "fictitious transactions" supported by "falsified documents." The transactions were reported as sales to HPL's Japanese distributor, Canon Sales Company, a unit of Canon Inc. But the audit committee chairman said Canon had never agreed to enter into the transactions.

In addition, the company acknowledged that much of the $60 million reported in cash at the end of March is not now and may never have been in the company's possession. HPL expects to restate results for the year ended March 31 and possibly for the previous year, when it was still a privately held company.

HPL has dismissed the former CEO and is investigating whether other officers or employees were involved. A law firm and forensic accountants were hired to conduct the investigations. PricewaterhouseCoopers remains HPL's auditors.

-Rosemary Schlank

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