Ernst & Young has resigned as auditor to Riverdeep over "incorrect representations" about its lucrative contract with the firm that supplies educational software to the US retail market.
The collapse of Riverdeep's relations with its auditor of many years comes only weeks after group chief Barry O'Callaghan raised $4.15 billion (€3.16 billion) from banks and private investors to finance its mammoth reverse takeover of Boston publisher Houghton Mifflin.
Mr O'Callaghan raised $3.14 billion in debt from Credit Suisse and Citigroup to fund that deal, in addition to $350 million in preferred equity and $660 million in new equity from private investors, including a large number of Davy Stockbrokers' clients.
He insisted yesterday that the auditor's resignation would have no bearing on the prospects of Houghton Mifflin Riverdeep and said its business plan was ahead of schedule. "It's changed absolutely nothing because it doesn't relate to people who have any reflection on the enlarged company."
Mr O'Callaghan said the issue that led to the resignation resulted in only an "immaterial" adjustment to Riverdeep's accounts for the first nine months of 2006, before the Houghton Mifflin deal took effect. He said he had immediately taken "corrective action" within Riverdeep and had told creditors, lenders, and significant investors in the enlarged group of the situation in a conference call on Monday night.
"They've made a decision, which I regretfully accept," he said of the resignation.
Ernst & Young made it clear in a letter to Riverdeep on January 31st, which was filed to the Companies Office on Tuesday, that there was no prospect of restoring relations between the two groups. "As a result of incorrect representations made to us by the company's parent in respect of a material contract, the professional relationship between us and the company has irretrievably broken down and we have concluded that we cannot continue to act as the company's auditors."
Such representations are understood to concern the treatment in Riverdeep's management accounts for the first nine months of 2006 of revenues from its US retail contract with a firm called Encore, part of the Nasdaq-listed Navarre Corporation.
Encore guaranteed revenues of $10 million for the first two years of the contract, 2004 and 2005. Revenues in 2006 were not subject to the same guarantee, meaning that only the actual level of sales should have been included in Riverdeep's management accounts. However, it appears the revenues for the nine-month period were treated as if they were subject to the same guarantee.
The correction of this matter had the effect of reducing Riverdeep's earnings before interest tax depreciation and amortisation to $84.6 million from $86.2 million in the 12 months to September 2006.
Mr O'Callaghan said: "I investigated the matter fully. I've satisfied myself that it's an isolated incident. It has no bearing on the new enlarged company that we've created from January 1st."
There was no comment yesterday from Ernst & Young, although sources close the firm said it had not been seeking the audit contract for the enlarged Riverdeep. Houghton Mifflin's auditor is PricewaterhouseCoopers.
