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Bad Earnings at 2 Companies Send Stocks Down

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Stocks are headed for a lower close today following a handful of disappointing earnings releases. As of 2:55 p.m. EST, the Dow Jones Industrial Average (INDEX: ^DJI  ) is down by 36 points, or 0.28%.

The disaster that is HP
Shares in Hewlett-Packard (NYSE: HPQ  ) are down in the double digits after the personal-computer maker reported quarterly earnings that were far below analysts' expectations. Analysts were surprised by an $8.8 billion goodwill charge-off that HP recognized during the quarter related to its 2011 acquisition of the U.K. software maker Autonomy.

The drama surrounding this has grown throughout the day. It started this morning when HP CEO Meg Whitman acknowledged that an internal review of the deal revealed "serious accounting improprieties" and "outright misrepresentations" on the part of Automony's executives. More specifically, according to The Wall Street Journal, it's alleged that the software maker intentionally mischaracterized low-margin sales of hardware as sales of software, which carries a higher margin, and that it recognized revenue in some cases where no sale actually occurred. HP has purportedly asked the SEC to look into the matter.

Following these allegations, the executive in charge of HP at the time of the deal, Leo Apotheker, immediately went on the defensive, saying:

Looking back on the acquisition, which closed in Sept. 2011, the due diligence process was meticulous and thorough, and included two of the world's largest and most respected auditing firms working on behalf of HP. Since Autonomy was a public company in the UK, much of the process relied on public financial reports -- accounting statements approved, filed and backed by Autonomy's leadership, board and auditors.

The former CEO of Automony, Michael Lynch, then surfaced in an interview with The Wall Street Journal claiming that he has been "ambushed" by the allegations and that they are "utterly wrong and we reject them completely." With respect to the writedown, Lynch said:

The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it?

To add insult to injury, this is the second large goodwill charge for HP in as many quarters. In the previous quarter, it recorded a $9.2 billion writedown related to its acquisitions of technology services provider EDS and rival personal-computer maker Compaq, which HP purchased for $25 billion more than a decade ago.

Best Buy follows HP's lead
Also lower by double digits today are shares of Best Buy (NYSE: BBY  ) . Like HP, Best Buy released third-quarter earnings today that disappointed analysts. For the quarter, the company reported a loss of $0.03 per share versus net income of $0.42 per share in the third quarter last year. Adding insult to injury, Best Buy said that its same-store sales -- an important metric in the retail space -- fell by 4.3%.

While the ailing retailer had previously warned analysts that its third-quarter earnings would be "significantly below" the figures from a year ago, the results today were nevertheless a cause for alarm. The company also lowered its full-year earnings guidance, though it tried to reassure the market that it has access to sufficient cash to make it through the holidays -- something former competitor Circuit City was unable to do before it filed for bankruptcy.

The Foolish bottom line
Given the troubles at companies like HP and Best Buy, sometimes investors are better off going with sound companies that pay generous dividends. To discover three such companies, click here to access our free report: "The 3 Dow Stocks Dividend Investors Need."

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