UPDATED: BT takes £530m hit following accounting scandal at Italian arm

File photo of a BT infinity router, as the telecoms giant warned on profits after saying it expects to take a �530 million hit from the fallout of accounting irregularities at its Italian division, up from a previous estimate of �145 million. PRESS ASSOCIATION Photo. Issue date: Tuesday January 24, 2017.  Photo: Chris Radburn/PA Wire
File photo of a BT infinity router, as the telecoms giant warned on profits after saying it expects to take a �530 million hit from the fallout of accounting irregularities at its Italian division, up from a previous estimate of �145 million. PRESS ASSOCIATION Photo. Issue date: Tuesday January 24, 2017. Photo: Chris Radburn/PA Wire
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Shares in BT plummeted after the firm warned that profits would take a hit from the fallout of an accounting scandal in its Italian division, which will see it book a £530m writedown.

The figure was revised up from a previous estimate of £145m and the news saw shares plunge by as much as 19 per cent in morning trading, wiping more than £5bn off its market value.

The telecoms giant said that following an independent review of the business by KPMG, the “extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified”.

An investigation revealed improper accounting practices and a “complex set of improper sales, purchase, factoring and leasing transactions”, BT added.

The net result is there has been an overstatement of earnings at BT’s Italian business over a number of years, leading to the upwards revision in the value of the writedown.

BT chief executive Gavin Patterson said: “We are deeply disappointed with the improper practices which we have found in our Italian business.

“We have undertaken extensive investigations into that business and are committed to ensuring the highest standards across the whole of BT for the benefit of our customers, shareholders, employees and all other stakeholders.”

The group first revealed the accounting errors in October last year and on Tuesday said the investigation is now “substantially complete”, adding that it is attempting to establish how the £530m hit should be reflected in its financial statements for current and previous periods.

However, the firm said it expects the fiasco to result in a reduction in its third-quarter adjusted revenue and adjusted earnings of around £120m.

For the financial year as a whole, BT expects adjusted revenue to decrease by around £200m and adjusted earnings by £175m. It expects to take a similar hit next year.

To compound matters, BT also warned that the outlook for UK public sector and international corporate markets has “deteriorated”.

For its business and public sector divisions, it is pencilling in a double-digit year-on-year percentage decline in fourth-quarter underlying earnings.

The group said in a 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 February 1, 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 Italian business accounts for around 1 per cent of its total earnings.

BT is also conducting a broader review of financial processes, systems and controls across the group and its remuneration committee will “consider the wider implications” of the BT Italy investigation.

George Salmon, equity analyst at Hargreaves Lansdown, said yesterday: “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.”

It has been a dark day for BT’s shares, according to Neil Wilson, the senior market analyst at ETX Capital.

He added: “BT Group stock skidded 15 per cent lower on the open, slumping to their lowest in more than three years. The group’s own investigation of accounting malpractice in its Italian business shows the situation is far worse than it first thought.

“The problem is that investors will fear that this is not the end – what else will be uncovered? The costs could yet rise and that fear is driving the selling this morning.”

Analysts at Haitong Research added: “Today BT warned about BT Italy and the outlook for UK public sector and international corporate markets, which is a bitter disappointment to us.

“More so because, we think, these two issues are far from the most consequential drivers of BT’s share price at current levels: we think regulation and the pension deficit remain much more important determinants of BT’s net present value.”