The writedown of items on BT’s balance sheet almost quadrupled to £530 million from the £145 million announced in its half-yearly update in October that first revealed news of accounting irregularities in its Italian business, according to a press release from last Tuesday.
An independent review by KPMG of the Italian operation’s accounting practices was included in the company’s own review of its balance sheet. The investigations “revealed that the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring, and leasing transactions. These activities have resulted in the overstatement of earnings in our Italian business over a number of years.”
The improper behaviour in our Italian business is an extremely serious matter, and we have taken immediate steps to strengthen the financial processes and controls in that business.
BT Press Release
The company is still evaluating what proportion of the total adjustments should affect prior year results and what portion should be accounted for in the current cycle. Undoubtedly, these changes will affect the group’s financial statements for the current and previous periods. The press release predicts, for the 2016/17 fiscal year, a decrease in adjusted revenue of around £200 million, in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of around £175 million, and of up to £500 million of normalised free cash flow “due to the EBITDA impact and the one-off unwind of the effects of inappropriate working capital transactions.” Similar effects are predicted for the 2017/18 fiscal year. The effects would be greater, but the release states that the EBITDA contribution of the Italian business to group EBITDA for the financial year ended 31 March 2016 was around 1 percent.
In response to the scandal, the Financial Reporting Council (FRC) issued a short statement: “Following BT's statement about its review of accounting issues in its Italian business we are making enquiries as to whether the auditors fulfilled their duties and if these matters require the FRC to investigate formally.”
The press release notes that the company suspended some members of the Italian senior management team and that they have now left the business, but it does not name names. BBC reports indicate that these included former Chief Executive Gianluca Cimini and Chief Operating Officer Stefania Truzzoli, but the company would neither confirm nor deny this. The release also announces the appointment of a new chief executive of BT Italy who will take charge on 1 February 2017, but again, no official announcement has been made, nor has the company disclosed any candidates. This new CEO “will review the Italian management team and will work with BT Group Ethics and Compliance to improve the governance, compliance, and financial safeguards in our Italian business,” said BT. The BBC also said it had learned that the company may institute clawbacks of incentive payments made to senior management in the group if it turns out that they were based on inflated financial metrics and would not otherwise have paid out.
We are deeply disappointed with the improper practices which we have found in our Italian business. We have undertaken extensive investigations into that business and are committed to ensuring the highest standards across the whole of BT for the benefit of our customers, shareholders, employees and all other stakeholders.
BT CEO Gavin Patterson
In an ironic twist of history, back in 2011, BT’s company Secretary Andrew Parker wrote to the FRC on the occasion of its consultation on Effective Company Stewardship, which aimed to enhance audit controls. In it he disagrees with the FRC’s suggestion: “that the auditor’s report should identify any matters in the annual report that they believe are incorrect or inconsistent with the information in the financial statements or obtained in the course of their audit.” He claimed that this was already required by International Standard on Auditing (ISA) 700. But now it looks like a belt-and-braces approach might have been a good idea after all.