The Tide Is Turning

It seems like only yesterday that the publishing world was in an uproar, when Riverdeep swallowed that mighty whale Houghton Mifflin. All the players in the drama were happy, content, and a new educational publishing company was ready to arrive on the scene and make it big.

Ernst & Young, well-known accounting firm, has just quit as Riverdeep's auditor. citing "incorrect representations" made to them about a contract between Encore and its parent Riverdeep. They have been Riverdeep's accountants for many years, yet one has to wonder what could be going on to alarm the bean counters, and this after Barry O'Callaghan put the financial package together. Remarkable that he could scrape up $4.15 billion for his pet project. Frightening that $3.14 million of that is debt financing through Credite Suisse and Citigroup.

Never fear, investors, because Mr. O'Callaghan has his hand on the tiller and the vast ship of HM Riverdeep is on course. There will be a slight adjustment to Riverdeep's accounts for the first three quarters of 2006, but that's the time before the merger took place, so don't be alarmed. Riverdeep will simply re-state its earnings from $86.2 million down to $84.6 million, all the principal players in the deal have been informed and this will have no bearing on the enlarged company.

According to the contract, Encore guaranteed revenues for the first couple of years, but there was no such guarantee for 2006. Unfortunately, whoever did the books failed to report actual sales and went with the former revenue guarantee, which had the effect of padding the bottom line. Mr. O'Callaghan described it as an isolated incident. After the slow and painful death of accounting heavyweight Arthur Andersen, one can understand why Ernst & Young would exercise an overabundance of caution, isolated incident or not.

Ernst & Young has let it be known that they were not interested in the accounting contract for the merged company, and never had been seeking the job when the merger was being put together. Businesses exist to make money, yet Ernst & Young was not interested in the HM Riverdeep business. Odd how it reminds one of rats being the first to leave a sinking ship, with their exodus serving as a warning to those on board.