FRC launches investigation into PwC over BT audits

The Financial Reporting Council (FRC) has launched an investigation into PwC’s audits of the financial statements of BT Group between the years March 2015 and 2017.

The telecoms giant revealed accounting irregularities in its Italian branch following an internal investigation in which BT Italia was found to be overstating its earnings for several years.

These accounting errors will cost the group £530m. While that number was initially forecast to be £145m in October 2016, the figure dramatically inflated when a complex web of improper practices was discovered, including improper sales, purchase, factoring and leasing transactions. The fraud extended from complex procedures to simple ones such as moving expenses into the “capital expenditure” column, which is ordinarily reserved for building and acquiring assets.

The accounting watchdog confirmed an investigation was underway following “announcements by BT in relation to accounting issues in its Italian operations.”

BT commented: “We note the FRC’s announcement that it has commenced an investigation into the audits by PWC. It would be inappropriate for us to comment further at this stage.”

Following the scandal in January, BT’s share prices plummeted by 19%, removing roughly £7bn from its value and forcing the CEO to forfeit his bonus and earn £4m less than the previous year. BT also suspended several members of BT Italia’s senior management team and replaced the chief executive Gianluca Cimini.

The scandal is one of many currently faced by the embattled telecoms group, who recently cut 4,000 jobs as part of an international overhaul. In March, the company was fined a record £42m by Ofcom for regulatory breaches in the company’s Openreach branch, with further compensation payments of £300m expected.

In response to the FRC’s investigation, PwC commented: “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.”

In June 2017 BT appointed KPMG as its new auditor, terminating a relationship with PwC that began in 1984.

The FRC has recently closed an investigation into PwC’s auditing of Tesco.