Reed warns of hit from accounting irregularities

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The Independent Online
Reed Elsevier, the Anglo-Dutch publishing group, yesterday stunned investors by warning that profits would take a substantial hit this year after the discovery of irregularities in its Travel Group division. As Cathy Newman reports, City analysts believe that the charge could amount to as much as pounds 100m. Shares in Reed plummeted 50p to 536.5p after it said that overstated circulation figures in its troubled Travel Group subsidiary would force it to make a substantial provision in its accounts this year.

Reed said circulation figures in the division's hotel and airline directories between 1991 and 1996 had been overstated to advertisers, who would as a result need to be recompensed.

The Travel Group's new management team had unearthed the problems in an internal review, the company said.

Nigel Stapleton, co-chairman of Reed, said the board had decided to release the news after a hastily-convened board meeting yesterday afternoon. He denied analysts' suggestions that the announcement had been rushed, adding: "This disclosure has not been forced upon us by any inquiry, and we were absolutely not aware of any market rumours. It's not a Friday afternoon cover-up."

Mr Stapleton, said the board had considered delaying the announcement until the size of the charge had been determined.

He added: "Overstatement of circulation is not unknown in the media industry. But it is unique to Reed." He said that although similar instances of recompensing advertisers had been known in the US, he was "not aware of any precedents in the UK".

Independent accountants and auditors have been called in to investigate the situation, Reed said. The process is expected to take some months.

Observers said the company could face a hit of up to pounds 100m, or between 5 and 20 per cent of the hotel and airline directories' pounds 500m advertising revenue during the period in question. However it was thought unlikely that heads would roll as a result because the Travel Group management team is new. Mr Stapleton said: "Finger-pointing is entirely inappropriate."

Anthony de Larrinaga, media analyst at Panmure Gordon, said: "This is a bolt from the blue from a company where one rarely sees bolts from the blue."

However, Mr de Larrinaga said senior management had taken the right action to try to improve Reed Travel Group's standing.

He added: "Reed Travel has been a problem area. Maybe they're trying to add credibility to this area."

Mr de Larrinaga questioned the hastiness of the statement and said the market had panicked because of the lack of detail. "The market hates half- statements, particularly on a Friday afternoon." He added that the high regard in which senior management is held in the industry might have worsened the "emotional impact" on the share price.

Some analysts drew parallels with Pearson's accounting scandal in its US Penguin subsidiary, which forced it to set aside pounds 100m.