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Problems in Italy worsen

BT shares plummet 20% over ‘improper accounting’

Gavin PattersonBT shares fell more than 20% after cutting its forecasts for the next two years as a result of worse than expected accounting irregularities in its Italian business.

In October the company instigated an investigation, including an independent review by KPMG, into historical accounting practices in the division.

In a statement issued today BT said: “These investigations have revealed that the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions.

“These activities have resulted in the overstatement of earnings in our Italian business over a number of years.

“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.”

A writedown of £145m, announced in October, has been increased £530m.

The shares closed 79.55p (20.79%) lower at 303p. A number of heads are likely to roll and questions will be asked how PwC, which audited BT’s accounts, missed the scandal.

For 2016/17 it expects a decrease in adjusted revenue of around £200m, in adjusted EBITDA of around £175m, and of up to £500m of normalised free cash flow due to the EBITDA impact and the one-off unwind of the effects of inappropriate working capital transactions.

For 2017/18 it expects a similar annual impact to adjusted revenue and adjusted EBITDA as in 2016/17, with the EBITDA impact flowing through to normalised free cash flow.

Gavin Patterson (pictured), chief Executive BT Group, 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.”  

On the general trading picture, the company said:  “The outlook for UK public sector and international corporate markets has deteriorated. For Business and Public Sector, this means we now expect a double-digit year on year percentage decline in Q4 underlying EBITDA adjusted for the acquisition of EE.

“As a result of the outcome of the BT Italy investigation and the pressures in the UK public sector and international corporate markets, we now expect underlying revenue excluding transit adjusted for the acquisition of EE to be broadly flat in 2016/17 and adjusted EBITDA to be around £7.6bn.  Normalised free cash flow is now expected to be around £2.5bn.

“For 2017/18, we now expect both underlying revenue excluding transit and adjusted EBITDA to be broadly flat year on year. We expect normalised free cash flow to be £3bn – £3.2bn.”

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