SENIOR, the engineering company, admitted yesterday that one of its US aerospace subsidiaries had overstated its profitability for almost three years, sending its share price into a tailspin and prompting speculation that the group may be taken over.

Managers at the subsidiary - Ketema in San Diego, California - had overestimated the value of its inventory in order to boost figures, said Andrew Parrish, chief executive of the rubber tubing group. After stripping out the accounting irregularities, full-year profits will come in pounds 7m below target, at about pounds 28m.

"What has become painfully clear to us is that much of the inventory did not really exist or could not properly be valued at the level it said on the books," Mr Parrish said. "The management of Ketema got carried away with their commercial responsibilities at the expense of financial probity."

A full-scale audit in 1998 failed to uncover the problem, but it became apparent as Ketema took on longer-term contracts with bigger up-front costs.

The company is to shed 50jobs at Ketema, out of a 550-strong workforce, to make up some of the lost profitability. Four people have already been sacked for their part in the accounting affair, Senior said.

Senior shares closed down 21.5p at 70p, compared with their 240p peak in May 1998.

Mr Parrish said that the drop capped an annus horribilis for the group, which had already reported flat trading in its key European markets in June and been forced to rationalise.

Analysts said that they had trimmed their 1999 forecasts from pounds 35m to pounds 28m after the warnings, and added that the situation left the company vulnerable to predators. Senior said its projections for 2000 were unaffected.

One analyst said: "I wouldn't expect anything to emerge overnight because people will want to wait until a true trading base, in terms of profits, has been established.

"But this is the third disappointment in a row and the credibility of the management is coming under pressure."