$10bn Wiped Off BT Value; Scandal in Italian Unit

BT shares fell by 21 percent yesterday, after it was reported they had uncovered an accounting fraud in their Italian unit, and following other bad news about sales to the British government. Management cut their forecasts for the next two years, and the market responded by slicing GBP7.8bn (USD9.8bn) off the company’s market cap. This is the worst ever one-day fall in BT’s share price.

Reuters reports that Milanese prosecutors have opened an investigation into alleged false accounting and embezzlement at BT’s Italian unit. BT has so far declined to comment on the activities of Italian law enforcement.

The company announced a GBP530mn (USD663mn) write down of its Italian unit following a corporate investigation which found improper accounting practices and “a complex set of improper sales, purchase, factoring and leasing transactions.” The investigation was conducted by BT staff supported by an independent review from KPMG.

Per Reuter’s version of the story:

According to a person familiar with the situation, BT staff in Italy 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 alert them to the conduct.

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.

This accounting scandal has led to the suspension and departure of several executives. A new chief executive of BT Italy will take charge at the beginning of February.

Risk management, internal controls, inflation of revenues, whistleblowing… these are the kinds of subjects we discuss over and over and over again. Those telcos that have whistleblowing policies, and which perform internal investigations, still need to do more. Many telcos do a lot less. And who suffers most when telcos allow naughty managers to implement crooked schemes to boost returns? Shareholders are left to pay the price when execs engineer bullshit bonuses via phony profits.

Plenty of people work hard to prevent these scandals, but we need to work smarter, as well as harder. That means cleverer corporate policies, more transparency, more separation of duties, and more investment in technology that helps auditing and which can automatically identify suspicious activities within the business and with partners too.

We can do better. And at $10bn per scandal, we can afford to.

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.

Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a founding member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group, and is an editorial advisor to Black Swan. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

Commsrisk is edited by Eric. Look here for more about Eric's history as editor.