London - BT is facing a criminal probe into allegations of false accounting and embezzlement relating to a £530 million accounting scandal.
Prosecutors have opened an investigation into the telecom giant’s Italian unit after £8 billion was wiped off the value of the company on Wednesday.
It followed revelations over its Italian arm where managers were allegedly artificially depressing costs to inflate profits. They were taking loans to settle creditor bills which were not booked through the balance sheet.
PwC, BT’s auditor, is also facing questions over how it failed to spot the wrongdoing.
The scandal emerged in October when BT announced a £145 million writedown due to ‘accounting errors’.
But this week BT shocked investors by revealing the problems were ‘far greater than previously identified’. They forced BT to write down the value of its Italian business by £530 million, much larger than its initial estimate.
The revelation sparked a wave of panic selling, causing BT to lose a fifth of its value and led to a trio of US law firms to announce investigations into whether managers violated federal security laws.
The action in Milan is being led by Fabio De Pasquale, who run cases against public corruption in the 1990s centred on Italy’s former prime minister Silvio Berlusconi.
Yesterday, De Pasquale told the Financial Times the probe was focused on allegations of ‘false accounting and embezzlement’.
The allegation is the first suggestion that managers at BT in Italy may have benefited from the accounting scandal.
It is not known whether the investigation is focused on individuals or the company. BT declined to comment.
After the scandal BT Italia chief executive Gianluca Cimini and chief operating officer Stefania Truzzoli, left and, yesterday, Luis Alvarez, current head of the global services division, took control of the European business.
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Now BT’s management and its auditors are under pressure to explain how the practices were not picked up.
Ken Odeluga, a market analyst at City Index, said the failure to spot the issue put BT boss Gavin Patterson in the frame in the eyes of many shareholders.
PwC, which also audited Tesco while the supermarket was manipulating its own accounts, vetted the Italian business and failed to spot the wrongdoing.
A subsequent probe into the scandal by KPMG uncovered ‘inappropriate behaviour’, including ‘improper accounting practices’ and a ‘complex set of improper sales, purchase, factoring and leasing transactions’.
PwC was also the auditor when BT was forced to write down the value of its Global Services division by close to £2bn in 2009.
The group could also face further punishment, with accountancy watchdog the Financial Reporting Council FRC confirming it is considering launching its own investigation into the accounting irregularities.
An FRC spokesman said: ‘We are aware of BT’s statement about its review of accounting issues in its Italian business and we will consider if these matters require the FRC to investigate whether the auditors fulfilled their duties.’
Bonuses under threat
BT BOSS Gavin Patterson could be forced to return some of his bonus following the scandal.
The telecoms giant has a policy where it can ‘claw back’ cash and shares allowing it to take back all unvested awards if the basis on which the award was made was a misjudgement.
Patterson was paid £5.4 million last year – £969 000 in basic salary, a £1 million bonus and £3 million in shares – plus other awards and benefits. A fifth of his bonus was for hitting targets which may turn out not to have been hit once the scandal is taken into account.
It is not known how much Patterson will have to pay back.
Bonuses can be clawed back within a year while share awards can be withdrawn for up to two years. BT could also go after payments to Italian executives.