It would seem in the greater fraud world, companies continue to fail to read memos from The Man From FCPA. U.K. telecom giant BT is currently reeling from a fraud scandal involving its Italian business unit. Last fall, the company reported it was taking a £145 million charge related to “inappropriate management behavior,” which caused “historic accounting errors in the business unit. However the company’s outside auditors recently have pegged the losses at £530 million. (There is a technical legal term for this discrepancy; it is called oops.) The company has lost nearly £8 billion in value since the scandal was announced.

The kerfuffle involves a bit of fraud off the beaten track. Usually a business unit will try and goose up sales through channel stuffing or some other technique to make the numbers look good. However in BT Italia’s case, it defrauded on the expenses, mis-stating its operating costs into capital expense and using “off the books” (never good) loans to pay off expenses so that it would appear more profitable than it was in reality.

It appears there were failures at all three levels of defense in the fraud arena: management, internal audit, and outside auditors. One mechanism that did work with BT Italia was the internal reporting system, as it was a whistleblower who contacted senior BT managers in the United Kingdom on the fraud. Yet the issue remains: How did the fraud make it through the first three lines of defense?

As to the first line, management at BT Italia, that may have been the genesis of the fraud, as both the CEO of BT Italia and his COO were suspended by the company in September 2017. The company’s audit committee and internal audit function also failed to pick up the fraud and then when made aware of it, vastly understated its extent. Finally the company’s outside auditor, PwC also failed and KPMG had to be brought in to determine the full extent of the fraud.

BT chief executive’s response was to point “the blame squarely on a few rogue employees.” Tell me if you have heard that excuse before. 

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