Avon warns authorities of internal investigation

By Guy Montague-Jones

- Last updated on GMT

Related tags U.s. securities and exchange commission

Avon has informed federal authorities of an internal investigation into alleged irregularities surrounding expenses in China.

The direct seller told the Securities and Exchanges Commission (SEC) that it is looking into certain travel, entertainment and other expenses that may have been improperly incurred with its China operations.

Allegations of improper expenses

The allegation is that these expenses may not be in compliance with US statute Foreign Corrupt Practices Act (FCPA).

An internal investigation was launched in June 2008 under the oversight of the Audit Committee after Avon became aware of the allegations.

The company said that the investigation is currently in its early stages and no conclusion can be drawn yet as to its outcome.

Chinese operations have been a source of growth for Avon but they represent a small percentage of overall sales limiting the potential damage of the accusations.

Shares in the company were nonetheless down three percentage points to $29.69 in early trading today.

Tipped for success

Analysts have tipped Avon as a good buy in the darkening economic climate because of its business model and broad geographical spread.

In a client note, Citi Investment Research analyst, Wendy Nicholson said the company is built to withstand economic weakness because of its geographic diversity.

The company has a strong emerging market bent with less than a quarter of its sales coming from North America.

In addition, Nicholson drew attention to the company’s pricing strategy which should attract beauty consumers who are looking to keep a close eye on their spending.

The company’s finances are also in good shape. Having recently completed a comprehensive restructuring program Avon is well placed to increase investment and widen operating margins.