Farnell paid the US conglomerate ITT pounds 46.2m for Multicomponents, a Continental components supplier. But during an audit of the business Farnell found that profits in a Danish subsidiary were overstated by pounds 750,000.
Howard Poulson, Farnell's chief executive, said yesterday: 'This was a case of misrepresentation rather than fraud. No money went out of the business.'
He said the problem arose when an employee began massaging figures to meet budgeted goals. Mr Poulson said a bank account was set up from which the employee borrowed money to boost profits.
Under the terms of the sale agreement, ITT was responsible for all Multicomponents debts and has taken on the dollars 7m ( pounds 4.6m) accrued in Denmark. Mr Poulson said the employee had resigned and no further action was envisaged. The initially agreed price of dollars 70m was reduced to dollars 58.5m taking account of all matters arising from the audit.
Farnell also published much- improved figures for the year to 30 January. Helped by a two- month contribution from Multicomponents, sales increased by 26 per cent to pounds 320m and pre-tax profits jumped 36 per cent to pounds 49.4m. Tressan MacCarthy, an analyst with the stockbroker Panmure Gordon, predicts pre-tax profits of pounds 59.5m in the current year.
Underlying earnings per share - ignoring a one-off gain in last year's results - advanced 42 per cent to 24.4p.
Mr Poulson said the higher profits were earned as Farnell's underperforming manufacturing businesses were reorganised. He said the company also benefited from increased activity in the UK economy.
The dividend was increased by 19 per cent to 7.4p.