The Financial Reporting Council (FRC) has announced it is to investigate PwC’s auditing of BT Group, in light of the discovery of some £500m of losses in the telecom giant’s Italian subsidiary, which came to light via a whistle-blower last October and were subsequently found to relate to several years of misreporting
In its statement the regulator said: ‘Following completion of initial enquiries, the FRC has commenced an investigation under the audit enforcement procedure into the audits by PricewaterhouseCoopers of the consolidated financial statements of BT Group plc (BT) for the years ended 31 March 2015 to 2017 inclusive.
‘The decision to investigate follows announcements by BT in relation to accounting issues in its Italian operations.’
In October 2016, BT revealed that an initial internal investigation of accounting practices in its Italian business, prompted by an alert from a whistle-blower, 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.
A subsequent independent review commissioned by BT and led by KPMG with law firm Freshfields Bruckhaus Deringer saw the total losses revised upwards to over £500m.
In the audit committee commentary in its 2017 annual report, BT stated: ‘Italy has been a major area of focus for the committee and the improper practices that came to light in our Italian business via a whistle-blower are extremely disappointing.’
According to the annual report, the independent investigation ‘revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions in our Italian business.
‘The investigation identified collusion, circumvention and override of controls within our Italian business that was not identified by our monitoring controls thereby resulting in the misstatement of results going undetected for a number of years.’
BT’s adjustments relating to the investigation of the Italian business amounted to £268m for errors in prior years, plus a specific item charge of £245m for changes in accounting estimates, and investigation costs of £15m.
Earlier this month BT ended its 33-year auditing relationship with PwC, naming KPMG as its external auditor from the 2017/18 financial year, following a competitive tender for the £14.8m business.
In a statement in response to the FRC’s announcement, PwC said: ‘We will continue to co-operate fully with the FRC in its enquiries. The regulator has a duty to investigate where they believe there is a public interest, in order to give confidence to the financial markets.
‘Audit quality is of paramount importance to the firm. The FRC’s annual reviews of our audit work, policies and procedures show a continued trend of improvement in our work and we use the FRC’s insights, together with our own reviews, to continuously improve how we deliver high quality audits.’
FRC investigations are conducted by its executive counsel and enforcement division, who will examine whether there is a case to answer.
