Since Feb. 9, 2006, when the unfortunate news of "accounting irregularities" at ProQuest Co. (http://www.proquestcompany.com) came to light, the company, its shareholders, and its customers have waited anxiously while an independent committee of experts pored over its finances and records. On July 31, ProQuest announced that its Audit Committee had completed its investigation. The company issued a statement that detailed the key findings, foremost of which is that the evidence indicated that a single individual—the former VP Finance of the company's Information and Learning business unit (PQIL; http://www.proquest.com)—was responsible for the misstatements. While the report acknowledged that the company in general and PQIL in particular had "certain deficiencies in internal controls" that allowed this to happen, it stated that there was no evidence of undue pressure from corporate management to attain certain results. The individual has been terminated and the company is currently working to implement remedial measures, as specified by the Audit Committee. ProQuest continues to work with its auditors and said it expects to file its Annual Report on Form 10-K for fiscal 2005 in the fall of 2006.
The investigation of ProQuest's finances was conducted with the assistance of independent outside experts including the legal firm of Skadden, Arps, Slate, Meagher & Flom LLP and forensic accountants from Chicago Partners, LLC. These companies were chosen because of their prestige and autonomy, factors likely to matter to the Securities and Exchange Commission (SEC), which opened its own investigation. The work of the independent investigators sure sounded thorough: "Skadden has gathered and reviewed more than 3.6 million pages of documents, interviewed 53 persons, and conducted over 70 interviews."
The report is fairly explicit in indicating that the one finance executive and two people who reported to him were solely responsible for the misstatements. (Those two workers have since resigned from the company.) This is how it reads in the 8-K filing with the SEC.
The conclusions reached by Skadden, and accepted by the Audit Committee, were that the evidence indicates the former PQIL VP Finance intentionally manipulated the PQIL financial reports in order to inflate PQIL profits or to create the appearance of profitability. Additionally, the evidence indicates that the former PQIL VP Finance recognized the problematic nature of his conduct and at times made efforts to conceal information from others, including ProQuest's external auditors. Skadden and the Audit Committee also concluded that the evidence indicated that the former PQIL VP Finance acted intentionally to alter the reported financial condition of PQIL and that a direct report of the former PQIL VP Finance should have known that some of the former PQIL VP Finance methods (e.g., unsupported manual journal entries) lacked integrity. Further, the investigation concluded that a second person acting under the direction of the former PQIL VP Finance knew or should have known that his efforts to withhold certain information from ProQuest's external auditors were improper. Because, however, these individuals all denied engaging in purposeful conduct to distort the Company's reported operating condition, Skadden and the Audit Committee were not able to determine definitively whether an illegal act occurred.
The report indicates that there was no evidence that any other employee, officer, or director of the company had any direct knowledge of, or involvement in, the accounting misstatements. The company itself was not without blame, according to the report, but the weaknesses were in internal operational areas and were not intentional misstatements or failures of integrity. These weaknesses are being aggressively addressed.
Alan Aldworth, ProQuest chairman and CEO, said: "During this time we have been enormously grateful for the hard work and commitment of all our employees and the continued support of our customers. We have a new finance team in place including Richard Surratt, who joined us as Chief Financial Officer of ProQuest in November 2005, and William Rozek, recently appointed Vice President Finance at Information and Learning. Under their leadership I am confident we will fully implement the remedial measures directed by the Audit Committee and complete the restatement process. Our focus is now squarely on completing the accounting review and restatement process even as we continue to deliver the quality products and services that our customers expect."
The company has been tightening its belt as well as its accounting procedures. It initiated measures "focused on reducing headcount, capital expenditures, and operating expenses, and establishment of a Special Committee of its Board to explore strategic alternatives to reduce debt and enhance value, including the potential sale of the company's Business Solutions segment." Business Solutions is an automotive information unit based in Tennessee. This is still a possibility, according to a company spokesperson.
David "Skip" Prichard, president of PQIL, has stressed all along the company's focus on its customers during the difficult investigation. In a recent letter to customers (posted at http://www.proquest.com/promos/product/proquestjulyupdate.pdf), he wrote: "I want to be clear that these issues do not degrade our ongoing operational performance for you and your end-users. As always, our number one priority is to create information solutions that meet your needs and exceed your expectations. In 2006, we are investing $50 million in product capital to do just that." And, after enumerating a long list of recent product developments, he added: "We're not done by a long shot, and you can expect to see additional compelling solutions from ProQuest yet this year."
Prichard said that customers have been very supportive since the news broke in February. He admitted that they exhibited a range of emotions—disappointment, shock, and confusion, but also a great deal of sympathy and encouragement. Prichard said he received this comment from a key customer last week: "It is clear that ProQuest has taken a proactive and positive approach to what must have been a very difficult experience for the company....We have no doubt that you will successfully move through and beyond these restatements."
ProQuest's employees experienced their own continuum of reactions, which included denial, anger, and resentment—but most have now resolved to move forward. Prichard said: "[This person] had been a highly trusted member of our leadership team. I'm completely at a loss as to why someone would do this. But, we tried to keep distractions to a minimum and focus on our customers. While no leader would ask to be in this situation, I know that ProQuest is stronger as a result of it. We have deepened our communications with customers and sharply focused our team on delivering compelling solutions every day." He added that he was "unbelievably proud" of how ProQuest employees have handled the situation.
ProQuest stock currently trades around $12 a share. In February it traded at around $29. Because of angry and upset shareholders, ProQuest is still facing several lawsuits—a securities law claim (consolidating individual claims into one class action), a shareholder derivative claim, and an ERISA claim (because the ability to buy and hold ProQuest stock was part of the company's employment benefits package). These three matters are each pending in the U.S. Federal Court for the Eastern District of Michigan. According to a statement provided by a company representative: "There has been no material activity in any of the matters—no motions to dismiss, no discovery, no consideration of the merits. While we take the claims seriously, ProQuest is very confident of its position in each of them."
The SEC is continuing its own investigation and ProQuest management is cooperating fully with requests for interviews and information. The fate of the former VP Finance of PQIL now rests with the SEC, including any possible sanctions or other legal charges. ProQuest's policy is to not reveal the name of an individual who has been terminated.Now we'll watch for the company to continue implementing the remedial measures directed by the Audit Committee and then release its restated results for 2005 this fall. The misstatements involved $80 million or more over a 5-year period, so the company will also need to provide revised earnings back to 2000. One industry observer commented: "The event to watch will be the re-instatement of regular quarterly reporting and the restated historical results that will indicate how the business has been doing in the interim." Another simply said: "Good. They seem to have isolated and contained the virus. Now they can move on."