Serious mismanagement at Powerscreen's Matbro subsidiary led to a deficit of £46.6 million sterling at the end of 1997, the KPMG report into accounting irregularities at the company has found. It also concluded that some members of Matbro's management were aware of the emergence of problems from the summer of 1997 and that some of Powerscreen's former executive directors became aware of problems in the final months of 1997. However, investors who subscribed for an £18 million private placing in November were given no hint of the financial troubles at the subsidiary which manufactures telescopic handlers.

Selected extracts of the report by KPMG, auditors to Powerscreen, were published yesterday along with a circular to shareholders. The company said it could not publish the full report, nor could it specify when exactly the directors became aware of problems at Matbro, because of the legal implications.

In its report, KPMG said a weak business environment, a poorly controlled drive to increase export sales and expansion into the less profitable construction industry provided the backdrop in which the deficit arose. The introduction of new products which were inherently unprofitable led to falling sales prices in the ninemonth period to December 31st, 1997 and drove the company's actual gross margin down to a negative 8 per cent.

The auditors found that irregular accounting practices were followed at Matbro which, over a period of time, resulted in overstatements of the profit and cash positions to conceal the subsidiary's underperformance.

From March 1997 they identified an accounting breakdown. Time lags built into the trading cycle and the concealed use of complex financing instruments and long credit terms delayed detection of the emerging problem. KPMG also said weaknesses in the organisational structure of the company and the inadequate attention paid to the finance function allowed the problems at Matbro to emerge.

The business was divided into three divisions screening, crushing and materials handling and the three executive directors were responsible for several main subsidiaries but not for entire divisions.

"Executive director responsibility was not focused on either overall business activity or geographic location," KPMG noted.

It said the partnership culture among the three executive directors resulted in a reluctance on the part of the two non-executive directors who were not responsible for a particular subsidiary to challenge or interfere in the results or operations of that subsidiary.

KPMG also said the greater part of the group financial director's time was spent in the management of subsidiaries for which he was responsible.

Meanwhile, Powerscreen had no full-time staff resources dedicated to finance matters. There was no group treasury function, no internal audit function and no financial controller or analyst in the group.

The auditors found that the £46.6 million deficit was made up of £6.7 million in operating losses, £6.2 million in lost revenue, £13 million in higher-than-expected purchase costs and £11.1 million additional provisions.

A further £9 million related to prior year issues while £0.6 million was classified as "miscellaneous/unexplained".