In October 2016 the telecom giant said an initial internal investigation of accounting practices in its Italian business had identified ‘certain historical accounting errors and areas of management judgement requiring reassessment’. At that time, BT estimated the financial impact on the balance sheet at £145m.

BT now says it has progressed the investigation, including an independent review by KPMG of the accounting practices in its Italian operations and a comprehensive balance sheet review.

In a statement the company 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.’

In a briefing to analysts BT group finance director Simon Lowth said that the ‘most significant contributor’ to the accounting problems was ‘inappropriate and improper’ use of working capital loans. Lowth said the investigation had found working capital loans via factoring companies taken against receivables and used to pay suppliers.

BT says it is still evaluating what proportion of the total adjustments should be treated as prior year errors, and what proportion should be treated as the reassessment in the current year of management estimates. Work is also ongoing to establish how these adjustments should be reflected in BT group’s financial statements for the current and previous periods in light of applicable accounting requirements.

In addition, the company has said it now expects a reduction in its Q3 adjusted revenue and adjusted EBITDA of around £120m, and in a reduction in Q3 normalised free cash flow of around £100m.

For 2016/17 as a whole, relative to the previous outlook, BT 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, BT 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. The EBITDA contribution of the Italian business included in the group’s reported EBITDA for the financial year ended 31 March 2016 was around 1%.

BT described the improper behaviour in the Italian business as ‘an extremely serious matter’, and a number of BT Italy’s senior management team who were originally suspended have now left the business. A new chief executive of BT Italy will be in post on 1 February 2017 and will be required to improve the governance, compliance and financial safeguards.

The telecoms group said it was also conducting a broader review of financial processes, systems and controls across the business, while the group’s remuneration committee ‘will consider the wider implications of the BT Italy investigation’.

Gavin Patterson, 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.’