You would be forgiven for missing one of the biggest and most disturbing industry headlines in years because it came and went last week, completely over-shadowed by Mr Trump’s goings-on.
I refer to the monumental goings-on at BT Italia that was found to have been overstating profits for several years. BT first became aware of issues at its Italian unit, part of its Global Services division, last summer when a whistle-blower contacted senior management in London.
We are not talking about small change here. BT’s Global Services division boosted an expected write-down tied to its Italian division to £530 million (US$669 million) from the £145 million (US$183 million) originally stated.
Hang on, that’s half a billion quid! You’d think that sort of miscalculation would invoke an international Interpol investigation of monumental scale. All that BT’s Chief Executive Gavin Patterson could muster was to express disappointment with the “inappropriate behaviour” of senior management that was uncovered.
Inappropriate? More like criminal behaviour. Symbolic ‘harikari’ would be considered more appropriate or, at the very least, a swift resignation without the golden parachute he most likely has built into his contract.
It seems the incident has hardly raised a ripple amongst stakeholders in the UK, where falsifying figures does not appear to be a matter of great concern, unlike the USA where at least two shareholder lawsuits have been mounted, after one-fifth of the telecommunications company’s market value was wiped out in a single day.
The lawsuits accuse the company of having concealed or made misleading statements about the accounting practices in Italy, causing it to inflate earnings and its stock price. Both lawsuits seek unspecified damages.
However, the real issue here is the damage it does not just to BT’s standing but to the telecoms industry as a whole. As one of the world’s most regulated industries you have to wonder why it can’t manage its own internal accounting processes. It has access to the most sophisticated revenue assurance and anti-fraud systems available – in fact it leads the world in these areas – yet it can’t manage to identify half a billion pounds worth of non-existent revenue!
When modern day telcos emerged from the monolithic public institutions they started as, their biggest challenge was facing competition and transforming themselves into real businesses with bottom lines, stakeholders, new competitors and more demanding customers to deal with. Money management, one would assume, would be a critical component of that.
The mere thought of international expansion was probably never considered at the time but with increasing domestic competition and margins being threatened it has become a necessity, especially whilst cash is still available for expansion.
But with this comes the need to understand the intricacies of dealing in foreign markets, acceptable business practices and cultural anomalies that must be managed. Many a fine PTT has expanded into foreign markets that were basically colonies and followed the same regimens of the ‘mother’ country, but BT’s foray into Italy has proved to be a bit of a “stuff up”- to say the least.
It may wish to consider its own mini-Brexit from other European markets if this level of international management incompetence is anything to go by. I may sound harsh in my assessment of the situation but when you consider the size of this fraud – and make no mistake, this is fraudulent activity on a massive scale meant to deceive investors and the public – someone must take the blame and not palm it off simply as “inappropriate behaviour”.
Let me go one step further. What were BT’s external auditors doing when all of this was going on? Bugger all, it seems. Why are they not being taken to task by BT Global Services, the regulators and law enforcement in Italy and the UK. The level of incompetence demonstrated by PwC is as astounding as it is appalling, yet no one appears to be baying for their blood.
Oh yes, I forgot, they make their money sending in hundreds of junior accounting graduates with green pens to audit the books and most likely have their client sign a universal disclaimer that protects them from monumental blunders they might inadvertently make because they were given false information by the client. All care taken (ha) but no responsibility accepted – what a great business to be in!
And all that Sarbanes-Oxley BS that created this environment is now proving to be pretty damn useless when some company executives can get away with falsely reporting over half a billion pounds in the books.
No wonder BT has announced it is to bring forward a review of PwC as its auditors that will end a relationship that dates back more than 30 years.
FT reported that BT “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 whistle-blower 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. (What’s the bet KPMG will take over from PwC?)
Maybe BT will take PwC to court to try and recover some of the 20% its stock has been lost since the scandal broke, oh, and pigs might fly? It might want to start by taking a close look at the competence of its senior management running international business divisions before the courts and shareholders do.