BRITISH media group Pearson shocked the market yesterday, saying improper accounting at its Penguin USA books unit would force it to make a charge of up to £100 million sterling against 1996 profits.
The news of what one analyst called "quite a horrific provision" initially sent Pearson shares into a tailspin - falling by more than 9 per cent at one point - before rallying strongly to 745p for a loss of 22 1/2p as analysts said the news rekindled the view that the group was a candidate for a takeover bid.
Pearson said in a statement the problems, which date back to 1991 but only emerged very recently, arose from unauthorised discounting of invoices for early payment by customers, with the discounts not fully recognised in Penguin USA accounts.
The complex nature of publishers' accounts, with hundreds of thousands of transactions passing through the New York based Penguin USA's New Jersey facility where its accounting operations are, made it easier for a what a Pearson spokesman called a "very determined individual" to conceal the discrepancies.
"I think we are dealing with a very determined individual,"the spokesman said. "We are confident we have provided for not only what we have discovered so far but also what will be discovered (as the investigation continues to its conclusion)," the spokesman said, describing the likely provisions as conservative.
Pearson said that those found to be responsible for the problem, "have been and will be appropriately dealt with", without giving details. Ms Marjorie Scardino, who took over as Pearson chief executive at the start of the year, said in the statement, "We have moved quickly to implement a detailed plan of action to address these unauthorised practices."
Analyst Mr Anthony de Larrinaga of Panmure Gordon said the news showed Ms Scardino and her new team were "tightening up", but said it highlighted the problems she faced in tackling Pearson's woes, as well as asking serious questions of management controls.
The problems were uncovered by Mr Michael Lynton, who took over as Penguin chairman and chief executive in January, and his management team, and are being investigated by lawyers and by accountants Price Waterhouse.
Pearson said the profits of Penguin would not be restated and Pearson had not changed its 1997 profit expectations for the company as a result of the unauthorised discounts. The scale of the provisions compares with 1996 gross sales at Penguin USA - before allowances for books returned - of £300 million.
Another analyst, while describing Pearson's profit record over the past six or seven years as "dire", said the market awaited full details of the events in New Jersey. He said although thoughts of a bid remained "in the back of people's minds", investors would grant the new management team a period in which to bring about improvement at the company.
Pearson is due to announce its 1996 results on March 18th, when analysts hope to hear something of the new team's restructuring plans. Pre tax profits, before the Penguin USA provision, are forecast at between £235 million and £290 million sterling, down from £365.1 million in 1995.
