BT is to bring forward a review of its auditors in the wake of a damaging accounting scandal in Italy that will end a relationship with PwC that dates back more than 30 years.
The telecoms company was due to tender for a new audit partner in 2019 with a view to switching from PwC, according to people familiar with the situation. However, BT will now accelerate that following the accounting scandal that has engulfed BT Italia and triggered a £530m write-off.
BT first became aware of issues at its Italian unit, part of its Global Services division, last summer when a whistleblower contacted senior management in London. It initially pencilled in a £145m cost of inappropriate accounting but an in-depth investigation by KPMG uncovered a complex accounting scandal involving several people.
BT revealed the higher loss on Tuesday alongside a warning about government spending in Britain, which wiped a fifth off its market value.
The emergence of the worsening crisis in its Italian business has triggered a number of lawsuits against the company, notably one led by law firm Pomerantz that has filed a potential class action in New York against BT and its executives. The law firm led a class action lawsuit against BP over the 2010 oil spill in the Gulf of Mexico.
The scale of the accounting scandal at BT Italia has caught investors by surprise. The managers of the Italian unit have been accused by BT of artificially depressing its cost base to appear more profitable than it actually was. This was achieved through various schemes, including a process where loans were taken to settle creditor bills against receivables but those loans were not booked through the balance sheet.
Such activity can be hard to discern but people familiar with the KPMG investigation have also said that BT Italia’s management had been booking operating expenses as capital expenditure to boost its cash flow. Such methods, which were adopted by WorldCom during the technology boom to artificially boost profits, should have been spotted, according to the people.
BT has used PwC since it was privatised in 1984, when the auditor was known as Coopers & Lybrand, and has never tendered the business. A previous accounting problem at BT’s Global Services division in 2008 and 2009, which led to writedowns of almost £2bn, resulted in a change of personnel at PwC working on the account as the company sought to strengthen its audit functions.
European Union regulations introduced last year require companies to put the job of auditing their accounts out to tender once every decade, and change their auditor at least every 20 years.
BT had reserved the right to kick off an early tender for its audit business stating in its annual report that “service issues” could be a trigger for a quicker switch.
Both BT and PwC declined to comment.
BT will face further scrutiny when it reports third-quarter results on Friday. The stock traded flat at 302.5p on Thursday.
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