ProQuest has issued a release announcing that it will restate previously issued financial statements going back as far as 1999. The company has incorrectly accounted for its handling of deferred income and accrued royalty accounts in its subscription-based businesses. This is everyday stuff for accountants in the information industry, but a little obscure, even for stock analysts, on the outside. It's all about the fact that most information company contracts are paid at one time, but services are delivered throughout the year.
The crux of what happened to ProQuest is that the company delayed putting certain amounts of royalty payments to publishers on its books while at the same time recognizing portions of long-term subscriptions too soon. Therefore, it reported lower expenses and higher revenue than it should have. The firm's statement says that correcting this "will materially reduce earnings from continuing operations for many of the affected periods," so these were not just rounding errors, but likely systematic failures to apply standard revenue and cost accounting procedures.
Two law firms that often represent investors in claims of securities fraud are out looking for plaintiffs, having filed suits Friday and today looking for members for a possible class action suit. This is not a scandal of the sort inflicted on customers of the now defunct divine, inc., involving libraries that paid subscription fees to divine that were diverted to other purposes.
The scorecard of players and victims:
- Customers: neutral - no customers were incorrectly billed.
- Content owners: neutral - none were paid incorrectly.
- Lenders and private placement holders (who rely on certain representations to back certain debts): misled
- Shareholders (the ones who bother to read financial statements): misled
The bottom line is that ProQuest has mismanaged its basic subscription business accounting. This does not seem to be an exotic misdeed involving foreign accounts, offshore accounts, derivatives, or the like. That this apparently went on for five years is amazing and a huge black eye for the internal financial staff, internal auditors, and external auditors. The only "color" in the press release is that ProQuest's Audit Committee has engaged the whitest of the white shoe law firms, Skadden, Arps, to conduct an investigation, and that Skadden has hired "forensic accountants" from Chicago Partners. ProQuest seems determined to be very public about issuing a statement that - hopefully - there was no foul play. The story is ongoing, and we’ll update our analysis as it unfolds.