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Sinead Moore 27 Jan 2017 12:16pm

BT's audit relationship with PwC under threat

BT could end its 30-year relationship with PwC if the telecoms giant chooses to accelerate a review of its auditors in the wake of an accounting scandal in Italy which saw the company’s market value dive almost 20%

BT is due to tender for a new auditor no later than 2019, but this process could now be accelerated in light of this week’s accounting scandal which forced the company to downgrade its outlook for the next two years.

PwC has been BT’s auditor since 1984. The company outlined in its 2016 annual report that the Big Four firm’s reappointment has not been subject to a tender in that time.

BT confirmed that the company’s audit committee has reviewed the timetable for tendering adding that a measured rotation timetable maintains stability in the independent oversight provided by the external auditors and maximises efficiency and effectiveness while the business fully implements changes regarding the integration of EE.

It added that the committee may elect to accelerate the planned appointment of new auditors if appropriate, for example for service quality or independence reasons.

The results of an independent review by KPMG, which discovered that historical accounting errors identified in BT’s Italian business would cost the business up to £530m, nearly £400m higher than an internal investigation in October estimated, could merit the acceleration of the audit tender process given the scale of the scandal.

BT said the review revealed, “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”.

The telecommunications provider added that the activities have resulted in the overstatement of earnings in the Italian business “over a number of years”.

BT added that KPMG is reviewing the systems and controls of the company’s Italian operations and reporting directly to the chair of the BT Group Audit & Risk Committee.

BT is also conducting a broader review of financial processes, systems and controls across the group, including an assessment of whether there are any significant deficiencies or material weaknesses.

A spokesperson for BT said the company has not made any announcement regarding PwC and the Big Four firm remains BT’s auditors.

PwC could not provide any comment.

It is unlikely that BT will end its relationship with PwC immediately as the firm’s annual report highlighted that because BT draws on expertise from other accounting firms, a rotation of external audit services would require careful planning of transition periods to ensure that all services are fully contracted throughout the rotation process.

Speaking at an investor conference this morning, BT’s chief executive Gavin Patterson said it is too early to say if BT will bring forward the audit tender process.

BT added that the group’s Remuneration Committee will consider the wider implications of the BT Italy investigation.

BT’s third quarter results released today revealed a 59% drop in earning per share and 37% drop in pre-tax profits to £526m for the three months to the end of December.

BT said its headline revenues were up 32% to £6.12bn for the third quarter due to the acquisition of mobile phone operator EE - though they were 1.5% down on an underlying basis.

The group said many parts of the business were performing well, with broadband and TV revenues growing 8%, and more broadband customers shifting to high-speed fibre connections.

Chief executive Gavin Patterson said, " The good progress we're making across most of the business has unfortunately been overshadowed by the results of our investigation into our Italian operations and our outlook."

"We've undertaken extensive investigations into our Italian business, including an independent review by KPMG, and I am deeply disappointed with the unacceptable practices by some that we've found. This has no place at BT, and it undermines the good work we're doing elsewhere in the group. We are committed to ensuring the highest standards across the whole of BT," Patterson said in the statement.

BT’s head of Continental Europe stepped down this week, following the revelations of “inappropriate behaviour”.

BT also suspended a number of senior management team in Italy who have now left the business. A new chief executive of BT Italy is due to take charge at the beginning of February with responsibility for reviewing the local management team and working with BT Group ethics and compliance to improve the governance, compliance and financial safeguards in the company’s Italian business.

The FRC is keeping a close eye on the situation and a spokesperson said the watchdog wants to gather information before deciding if there is a case to be investigated.

"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," the spokesperson said.

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