The accounting scandal in BT’s Italian division went on for up to ten years, the company’s chief executive has admitted.
Gavin Patterson, who was promoted to the top job in September 2013, said investigations had discovered that financial irregularities had stretched back between “five and ten years”.
Almost £8 billion was wiped off the value of BT, one of Britain’s biggest public companies, on Tuesday when it said that the extent of accounting issues in its biggest business outside of the UK was far greater than previously identified.
BT’s shares fell more than 20 per cent after it said “improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions” would lead to a writedown of about £530 million in its accounts.
Italian prosecutors have opened an investigation into BT’s Italian business, while the Serious Fraud Office has declined to comment.
Mr Patterson faced renewed questions yesterday as BT updated the City on its third-quarter trading.
The results showed BT’s pre-tax profit fell 37 per cent to £526 million in the three months to December 31, which Mr Patterson said masked the progress that the company was making across most of the group.
“I am angry that the integrity of BT has been undermined by the wrongdoing of a few individuals in one part of the business,” he said.
BT said that the investigation into the financial position of BT Italia was “now substantially complete”, having appointed KPMG in October to conduct an investigation. It has resulted in £268 million in adjustments to prior year errors and £245 million of changes in accounting estimates for this financial year.
Mr Patterson, who succeeded Lord Livingston as chief executive, insisted that the situation was now under control. “We have cleaned out management and appointed a new CEO [of BT Italia]. We are rebuilding the Italian business,” he said.
Six executives from BT Italia are understood to have left. KPMG is also conducting a second review of “how and why this happened” and BT’s remuneration committee “will consider the wider implications of the BT Italy investigation”.
BT has said it was alerted to problems when a whistleblower emailed the company last summer. An initial internal review had underestimated the irregularities, however, with BT telling investors in October that it estimated a hit of £145 million.
BT appears to have had misgivings about its Italian business before, however.
The company’s audit and risk committee led reviews into specific markets, including Italy, in its 2012-13 financial year, which the committee was satisfied had “served to enhance our understanding of BT’s overall control environment”.
Defending the committee yesterday, Mr Patterson accused bosses from BT’s Italian business of “serious manipulation . . . They’ve been in front of the audit committee and lied . . . Ultimately lying can be very difficult to root out.”
Chief’s vision for BT was countered by his tin ear
If Gavin Patterson sees the BT share price as a verdict on his stewardship of the telecoms company, he will be none too thrilled this weekend. The shares are not only 22 per cent down on the week, but also 11 per cent below their price when he was elevated to chief executive in September 2013 (Patrick Hosking writes).
In essence the company is £3 billion less valuable than when he took over more than three years ago.
The Italian accounting scandal has unnerved even his biggest fans. “Our confidence has been shaken by events in Italy,” said Paul Marsch, a telecoms analyst at Berenberg, who downgraded the shares to a “hold”.
But the jitters go wider. The fresh warnings on dwindling public-sector client revenues, the unresolved battle over the future of Openreach and the question mark over BT’s vast pension promises have added to growing concern about BT’s prospects.
The City’s love affair with the company peaked in late 2015. The BT chief had clinched his big deal to buy football rights. He’d also provisionally agreed a deal to buy EE, the mobile phone operator.
The football deal put pressure back on its arch-rival Sky; the EE acquisition returned it to the mobile phone business 11 years after it sold O2 to reduce debts. The shares hit 500p.
The No 1 issue since has been the difficult negotations with Ofcom over the legal separation of Openreach. Rivals say that it gives BT a stranglehold on broadband provision.
Mr Patterson’s fans say that he has done a good job, so far, in preventing that outcome. His critics say that he has misjudged Sharon White, the Ofcom chief executive. According to one analyst: “He’s been poor at knowing when to bend to regulators and politicians. He seems to have a tin ear.”
The No 2 issue is debt and the pension fund and whether Mr Patterson has over-reached himself in signalling two years of 10 per cent dividend growth. The EE deal added billions to company debt. The pension fund, with its £11.1 billion shortfall, poses a potential threat as the latest triennial review looms.
No one is calling for Mr Patterson’s head, but the love affair is fading. His appearance at Davos last week on the day when BT was awarded a wooden spoon for rotten customer service by a national newspaper looked terrible. According to one senior City fund manager, Mr Patterson “needs a reality check”.