The share price of BT Plc (BT.A) fell by over 20% yesterday after reporting that it would have to write off £530 million in its accounts as a result of “improper accounting practices” in its Italian subsidiary. That included “improper sales, purchase, factoring and leasing transactions” according to the announcement by the company. BT’s CFO Simon Lowth commented that including borrowing against receivables to pay debts, improper sale and leaseback transactions and shifting of operating expenses into capital budgets. The company’s auditors are PWC.
Why is it that so many accounting scandals take place in Southern European countries – Italy, Spain and Greece for example? One of the biggest accounting scandals in recent years was also in Italy where Parmalat became the biggest European bankruptcy as a result (debt was grossly understated). Greece managed to even produce false national accounts so as to get admitted to the EU.
BT also indicated that underlying revenue would also be flat in 2016/17 and 2017/2018 and EBITDA also flat in the latter period. Large public sector and corporate business deals seem to be the problem. But they still expect to grow the dividend by 10% in those years. Prospective p/e is now about 10 with a yield of 5%. But BT was seen to be reviving its business and growing revenue recently which it seems is not the case after all, and it still has a massive pension deficit to fund.
The share price collapse just shows how even megacap companies can be hit by massive swings in sentiment, where institutional investors follow like lemmings and dump the stock regardless. Index tracking funds compound the problem because once the stampede starts moving, it’s difficult to halt.
Could this problem have been foreseen? Ed Croft wrote an interesting article on this on Stockopedia. He pointed out the warning signs were there – an apparent earnings manipulation risk (disproportionate increase in receivables, etc), declining share price momentum (the share price was already down by about 25% from its peak before the latest news), growing debt pile, huge pension deficit and broker estimates being downgraded.
He’s probably right and that the message is clear. Even with FTSE-100 stocks you need to keep an eye on what is happening to a company but nobody can predict where false accounting might appear. It’s just another indication that the audit profession is not doing such a great job as they think they are. There are way too many of these cases where the accounts of public companies turn out not be capable of being relied upon and they seem to becoming more frequent if anything.
Roger Lawson
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