US accounts scandal costs Pearson pounds 100m

Discounts affair at Penguin deals another blow to conglomerate but Scardino insists she is getting to grips with problems

Pearson, the sprawling media conglomerate, yesterday revealed that it had fallen victim to a complex accounting scandal which will force the group to take a pounds 100m charge against its 1996 financial results.

The irregularities centre on Penguin Books in America where a rogue individual in the accounts department had been secretly giving unauthorised discounts to retailers in return for early payment. Stretching back to 1991 the irregularities involved what Pearson described as "an accounting web of breathtaking complexity." It is thought that the irregularities covered a significant proportion of Penguin USA's book sales

Following heavy losses at Mindscape, the US software house acquired by Pearson in 1994, the Penguin problems cast fresh doubts on Pearson's ability to run businesses in America. Analysts said the scandal would also make Pearson more vulnerable to a break-up bid as predators seek to unlock the value of its disparate interests which range from Lazards, the merchant bank, to Madame Tussauds.

"The more they [Pearson] disappoint, the more people expect someone to bid for them," said Anthony de Larrinaga, media analyst at Panmure Gordon.

After sharp falls following the announcement, Pearson shares recovered to close 14p lower at 749.5p supported by takeover speculation.

The scandal is a huge blow to Marjorie Scardino, who only joined Pearson as chief executive last month. Yesterday, she stressed that the scandal did not affect the underlying profitability of Pearson and that the prompt action by new management showed that Pearson was getting to grips with the problems.

"This is still a strong company and I have been very impressed with the quality of the management in most of the divisions," she said.

The accounting scandal arose at Penguin USA's accounting functions in Bergenfield, New Jersey. Pearson claims one person involved in the accounts receivable division started offering discounts to retailers in 1991 in return for early payment. The discounts averaged 5-7 per cent

The employee was not at senior level nor paid a high salary. Though bonuses were payable Pearson claim there was no financial motive for the employee's action. It says the individual thought their job was to ensure prompt payment from customers and that success in this area would be welcomed by bosses.

Rumours had been circulating in the book trade that Penguin's US profits may have been overstated. "In recent years it has surprised many in the industry the way Penguin in the US has been able to fulfil very demanding financial targets from Pearson," said a senior figure in the book trade who has dealt with the publisher.

Pearson said that the complex environment of a publishing house, where huge numbers of invoices were circulated, made it relatively easy for a determined individual to deceive management and the auditors.

"This person was very sophisticated at moving sums of money around the system," Pearson said. One industry expert said Penguin's problem was not likely to affect the UK division, where operations were tighter.

The scandal was uncovered by Michael Lynton, who took over as chairman and chief executive in January having replaced Peter Mayer who retired. He discovered the irregularities when varying terms of trade with retailers emerged following the merger of Penguin USA with Putnam Berkley in 1995.

Pearson says the accounting practices were stopped immediately on discovery and have not been taking place at any other Penguin businesses outside the US or at Putnam.

"Those found responsible have been and will be appropriately dealt with," Pearson said yesterday. The individual responsible for the scandal was fired earlier this month. The company did not say if it would press for fraud charges.

Legal action against the former auditors Arthur Andersen is possible, though the company would not comment yesterday. Pearson has launched a full investigation led by its lawyers and its recently appointed auditors, Price Waterhouse.

It is possible that Penguin may be forced to make payments to retailers who were not given discounts.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
News
news
PROMOTED VIDEO
News
i100
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
art
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
tv
Life and Style
fashion
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all