UK telecoms firm BT has cut its revenue, earnings and cash flow forecasts for the next two years.
The reason for that was it had discovered improper accounting at its Italian business went far deeper than previously thought.
Its shares slumped and on Tuesday were on track for their worst ever one-day fall, cutting its value on the stock market by almost a fifth.
The problems in Italy got the headlines, but even more serious for the long term was BT’s revelation of a deterioration in its international corporate and UK public sector businesses which mean group revenue will now not grow for the next two years.
BT, which recently spent big with its purchase of mobile operator EE, is also facing a regulatory battle over its core network, a growing pensions deficit and the cost of expanding its TV business with expensive sports content.
BT said a review had found a complex set of improper sales, purchase and leasing transactions in Italy stretching back years.
As a result it was writing down the value of the business by around 530 million pounds (615 million euros) – more than three times the original estimate.
“I am deeply disappointed with the inappropriate behaviour we found,” BT Chief Executive Gavin Patterson said.
BT said it had taken immediate steps to strengthen its processes and controls in Italy. It suspended a number of the Italian senior management team, who have now left the business, and appointed a new Italian CEO.
“Further, we are conducting a broader review of financial processes, systems and controls across the group,” it said.
Corrado Sciolla, who headed BT’s Continental European operation, was reportedly set to resign.
Richard Marwood, senior fund manager at Royal London Asset Management which owns 0.9 percent of BT’s shares said he was concerned by the magnitude of the Italian writedown, given the modest size of the business.
“Prior to this morning’s news, BT investors had been concerned about BT’s large pension liabilities and the company’s relationship with its regulator, Ofcom. Today’s news is an unwelcome addition to those worries. Certainty on any of those issues would be welcomed by investors.”
BT : Top BT investor Royal London says surprised by scale of Italy scandal https://t.co/b6Gml5XWoc— 4-traders.com (@ForTraders) January 24, 2017
The Italian job
A person familiar with the situation told Reuters that BT staff in Italy had colluded with suppliers and third party groups to inflate cash flow over a number of years, before a whistleblower contacted senior executives at BT headquarters in London last summer to make them aware of what was happening.
In order to mask the underlying cash performance of the business, management used third parties to pay suppliers. It employed the same tactic in reverse, accelerating the speed that clients appeared to pay their debts.
Third-party factoring firms are common in Italy, where not all companies pay their debts promptly, but BT said the scale of the use in its Italian division, and the fact BT had used them itself to pay suppliers, had come as a shock.
Finance Director Simon Lowth said the drawing down of inappropriate working capital loans to pay creditors meant the process of unwinding the issue was more complicated than just reducing previously booked profit.
Britain’s accounting watchdog, the Financial Reporting Council, said it could investigate BT’s auditors. PWC was the auditor for BT Italia. It declined to comment.