9 Februari 2017 – Accounting scandals at listed firms often turn out to be much bigger than initially expected, investors know better than anyone. Last month, BT – formerly British Telecom –announced it had to take a write down of £530m, more than three times the expected amount.
In the fall of 2016, through a whistleblower, BT first discovered “inappropriate behaviour” at its Italian branch. Dubious transactions were used to boost profit and revenue figures.
Last month, the actual magnitude of the scandal was revealed after research by KPMG. BT issued a profit and revenue warning which took its share price into free fall. The share price dropped 20 per cent in a short time span, resulting in a loss of market value of £10bn.
PwC is the audit firm responsible for checking BT’s books, and it has been PwC for more than 30 years. And it is not the first time the audit firm blundered at BT. In 2008/2009, a write down of £1,6bn was necessary as PwC had not detected the overoptimistic values that were assigned to contracts that were acquired by BT Global Service Division. Dividend had to be halved.
In the aftermath of the scandal, the audit contract was not put up for tender (in fact, it has not been put up to tender since 1984). In other words, shareholders paid the price for the audit firm’s failure to detect fraud, instead of the audit firm itself.
Will history repeat itself?
BT has announced that the firm’s audit committee is reviewing the timetable of the audit tender process which it could choose to accelerate BT is due to tender for a new auditor no later than 2019). At the same time, however, a spokesperson for BT said the company has not made any announcement regarding PwC and that the Big Four firm remains BT’s auditors.
It is also unclear what shareholders can expect from the audit regulator. The Financial Reporting Council, the British watchdog, is looking into the situation but has not yet confirmed whether it will start an official investigation into the extent to which the auditors failed to fulfill their duties.