BT has discovered that the extent of the fraudulent activities of its Italian business has proven larger than estimated. The service provider says that an internal investigation, which included an independent review by KPMG LLP, has uncovered "inappropriate behavior" that will lead it to write down approximately £530 million ($663 million), significantly larger than the £145 million ($181.4 million) it expected to write down when it first announced the accounting discrepancies October 27, 2016.
The company says its review uncovered not only improper accounting practices but what BT described as "a complex set of improper sales, purchase, factoring, and leasing transactions." The malfeasance occurred over multiple years. BT says it has suspended several members of the Italian business's management team who now no longer work for the company. A new chief executive for BT Italy will be in place by February 1 of this year who will collaborate with BT Group Ethics and Compliance to shore up the unit's governance, compliance, and financial safeguards.
Meanwhile, BT management is figuring out how to adjust its books. The company says it hasn't yet decided how much of the total adjustments should be treated as prior year errors versus how much it should treat as a reassessment in the current year estimates. The company also is working to establish how the adjustments should be reflected in BT Group's financial statements for the current and previous periods "in light of applicable accounting requirements."
That said, BT expects the Italian mess to result in a reduction of its Q3 adjusted revenue and a drop in adjusted EBITDA of around £120 million ($150 million). It also expects a reduction in Q3 normalized free cash flow of around £100 million ($125 million). For 2016/17 as a whole, BT expects a decrease in adjusted revenue of about £200 million ($250 million) from its prior outlook, with adjusted EBITDA dropping around £175 million ($219 million) and normalized free cash flow shrinking up to £500 million ($625.4 million).
BT Italy contributed approximately 1% of the EBITDA BT reported for the fiscal year ended March 31, 2016.
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