BT got a stock market mauling yesterday as the telecoms giant issued a profit warning after revealing that it will take a half billion pound hit from the accounting irregularities at its Italian business.
The company said that an independent review of the subsidiary by accountancy major KPMG showed the “extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified”.
We are deeply disappointed with the improper practices found in our Italian businessGavin Patterson
BT’s shares plunged 21 per cent after it said it now expects to take a £530m charge from the affair, up from a previous estimate of £145m.
Group chief executive Gavin Patterson said: “We are deeply disappointed with the improper practices which we have found in our Italian business.”
The jolt to the City was sharpened by the group also saying that both its international corporate business and UK public sector activities were seeing tougher trading.
George Salmon, telecoms analyst at stockbroker Hargreaves Lansdown, said: “The revelation that accounting deficiencies in Italy are worse than previously thought is a bitter, and needless to say unwelcome, pill to swallow for BT investors.”
The company said KPMG’s more extensive probe had unearthed improper accounting practices and “a complex set of improper sales, purchase, factoring and leasing transactions”.
The net result is there has been an overstatement of earnings at BT’s Italian business over a number of years. As a consequence, the firm flagged to the City a likely cut in its third-quarter underlying earnings of about £120m, rising to £175m for the full financial year. It expects to take a similar hit next year.
BT said in its statement: “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.
“We suspended a number of BT Italy’s senior management team who have now left the business. We have also appointed a new chief executive of BT Italy who will take charge on 1 February 2017.
“He 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.” The division accounts for 1 per cent of group profits.
The timing and financial repercussions of the scandal is seen as particularly difficult for BT as its debts are pushing £9.6bn following its £12.5bn acquisition last year of of mobile phones group EE, and a review of the how to fund the company’s £9.5bn pension deficit looms this June,
BT, which first disclosed the accounting irregularities last October, said yesterday that the probe was now “substantially complete”. The former state-owned giant, whose shares closed down 79.55p at 303p, will issue a third-quarter trading update on Friday.