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City Talk: Auditors treading on dangerous ground

Auditors have always come under fire, especially so when things go wrong. John Maynard Keynes, the economist, renowned as much for his rudeness as his civility, once addressed the hapless auditor of a company where he was a director: "Everyone knows that auditors attempt to mislead, but do you seriously hope you can also deceive the directors?"

Reporting accountants to companies that float on the Alternative Investment Market are perilously close to entering some very murky territory. The now notorious use of financial projections in prospectuses for start-ups seeking AIM listings to provide some guidance to their level of future earnings has proved, in retrospect, to be misleading and has hardly painted a fair and accurate picture of a company's prospects.

Accountancy firms should think carefully about what use a projection serves, if it has no connection with reality. It is no good the accountant pointing to the caveats which adorn these prospectuses; in many cases, the projections serve as the basis for valuing the company.

One must ask, too, what sort of investor would put any faith in these illustrations, which seem of no more use than a finger in the wind. Investors have said that it is better than nothing, but the recent shenanigans leave a nasty smell in the air. Better that auditors wake up to the need to protect their reputations, and are only associated with an illustrative projection after its merits have been subjected to the most rigorous scrutiny.

Elsewhere, deals are still going through the market. A slight delay to the agreed pounds 297m acquisition of Midland Independent Newspapers by Mirror Group Newspapers came when Margaret Beckett referred the deal to the Monopolies and Mergers Commission. The referral was mandatory, and it is unlikely to cause more than a hiccup in the progress of the deal. But there is talk that Midland's weekly newspaper titles will be up for grabs once the deal goes through. MGN, which owns 46 per cent of Newspaper Publishing, publishers of the Independent on Sunday, dismissed the gossip.

The demerger of Fine Art Developments continues the fad for groups to unbundle, and split themselves up into their component parts. Fine Art is splitting itself in two with a new company, Creative Publishing, being listed on the Stock Exchange. Shareholders in Fine Art will receive one new share in Creative Publishing for every one share of the original business they own.

Creative Publishing in turn will have two divisions: publishing and stationery. In publishing, it will be Europe's largest publisher of greetings cards. Sales of pounds 163.3m and operating profit of pounds 20.9m will create a sizeable business in its own right.

The new shares in Creative Publishing are likely to trade at a substantial premium to those in Fine Art. But the value may lie in Fine Art, and there may be more incentive to snap up a few shares in the mail-order business.

According to the house broker Beeson Gregory, biotechnology start-up Alizyme will have used up all its cash by the end of 1998, and will be showing a deficit of pounds 3.56m. At its interim results last week, the company announced a breakthrough in its drug to treat mucositis - the condition of a dry oesophagus, created by chemotherapy - which is entering pre-clinical trials. The shares still look attractive in the long run.