April 23, 2019
By Emilio Parodi
MILAN (Reuters) – A criminal investigation into accounting fraud inside British Telecom’s Italian unit has uncovered more evidence of what prosecutors say was the involvement of senior executives in artificially inflating the division’s financial performance.
Emails seized by the police and reviewed by Reuters show for the first time why Italian prosecutors allege that top BT employees were at the heart of the problem, contrary to the company’s assertions that managers at head office knew nothing about the misconduct.
“A series of emails between the top financial executives of BT Plc and managers of the (Italian) unit point to the existence of ‘insistent’ requests by the leadership of the parent company aimed at achieving ambitious economic targets, even using aggressive, anomalous and knowingly wrong accounting practices,” Italy’s financial police said in a 353-page report.
The report has not been made public and its contents have not previously been reported.
The report contains emails from Brian More O’Ferrall, currently finance director at BT Wholesale, the company’s business-to-business division, in which he asks colleagues in Italy to find ways of adjusting their accounts to boost profits.
At the time, O’Ferrall was chief financial officer (CFO) for BT Europe, the European part of Global Services, one of the company’s biggest businesses.
O’Ferrall did not respond to Reuters’ requests for comment. BT declined to make O’Ferrall or group Chief Executive Philip Jansen available for interview.
“We cannot comment on ongoing legal proceedings,” spokesman Richard Farnsworth said.
In the past, BT has blamed former executives in Italy for the bookkeeping irregularities, saying they had kept their bosses in London in the dark about what was going on. The scandal required the company to take a 530 million pound charge in early 2017. For a timeline click on.
In a complaint filed in April 2017 with Milan prosecutors against the conduct of its former managers, BT said the company itself was a victim of any fraud found to have taken place.
Italian prosecutors named three top BT executives among an expanded list of 23 suspects allegedly involved in the debacle, Reuters exclusively reported in February. O’Ferrall was not on that list.
Prosecutors are not investigating O’Ferrall because he was not on BT Italy’s board and did not sign off on the division’s accounts in the four years, 2013-2016, under scrutiny, according to a source familiar with the probe.
O’Ferrall was appointed chairman of BT Italy in February 2017, taking up the post after an internal investigation was launched into the unit’s bookkeeping. He stepped down from that role in November 2018.
Prosecutors in Milan allege that three former senior BT executives, Luis Alvarez, Richard Cameron and Corrado Sciolla, set unrealistically high business targets and were complicit in false accounting at BT Italy.
Alvarez and Cameron, were respectively the former chief executive and former chief financial officer of BT Global Services and Sciolla was the former head of continental Europe for BT. The three men, two of whom were based in London, left the company in 2017.
Reuters tried to contact Alvarez and Cameron via social media and email but they did not respond to those requests for comment. Sciolla declined to comment.
“AN URGENT REQUEST”
Allegations of fraudulent bookkeeping are part of a range of suspected wrongdoing at BT Italy. Italian prosecutors allege that a network of people at the unit exaggerated revenues, faked contract renewals and invoices and invented bogus supplier transactions in order to meet bonus targets and disguise the unit’s true financial performance.
The company has publicly disclosed that it uncovered a complex set of improper sales, leasing transactions and factoring at the division. Factoring is a way in which firms sell future income to financiers for cash.
Several BT shareholders have filed a class-action lawsuit in the United States alleging the group misled investors and failed to promptly disclose the financial irregularities. BT has moved to have the case dismissed.
In their report, Italy’s financial police reference an email dated Aug. 5, 2016, from O’Ferrall in which he says that Cameron wanted operating profit to increase by 700,000 euros and suggests to Luca Sebastiani, then CFO at BT Italy, along with other colleagues across Europe, that they capitalize labor costs as a solution.
“All, I have an urgent request from Richard to find another €700K,” O’Ferrall wrote to Sebastiani and his counterparts in Germany, Benelux, France, Spain, Hungary as well as Simon Whittle, then finance manager, reporting and consolidation, at Global Services Europe.
“Please can you look at all opportunities and come back to me and Simon asap. Labour capitalization? Regards Brian,” says the email, whose subject line reads “Another €700K EBITDA needed in P4.”
P4 refers to the month of July.
Reuters tried to reach Whittle via social media but he did not respond to requests for comment. The other finance officers O’Ferrall contacted did not respond to Reuters requests for comment.
Sebastiani’s lawyers, Giammarco Brenelli and Federico Riboldi, told Reuters the email was significant because “along with many others, it shows the constant and unrelenting pressure the parent company was putting on European subsidiaries with regards to accounting policies.”
Sebastiani is among the 23 suspects in the case.
In another email, dated April 8, 2016 and sent to Sebastiani’s predecessor Alessandro Clerici and Rosa Ronda Andres, CFO for BT Global Services in Spain, O’Ferrall says he has received a request “to find another €1 million of capitalization for 15/16.
“Can either of you accommodate this? €500K each?” the e-mail says.
Clerici and Andres did not comply with the request, according to a source familiar with the matter.
Andres did not respond to Reuters’ requests for comment. Clerici declined to comment. He is among the 23 suspects in the case.
Capitalizing costs is an accounting method that allows companies to amortize a cost related to an asset over time as opposed to book it as an expense in the income statement when the cost was incurred. The technique allows companies to smooth out expenses over time, and therefore boost profits.
“You can’t capitalize labor costs to improve earnings ex post (after the event), just to boost your accounts,” said Gian Gaetano Bellavia, an accounting expert who has in the past worked as a consultant for the Milan prosecutors. He is not involved in the BT Italy investigation.
Bellavia said it was common for top executives of a parent company to ask managers of subsidiaries to “always do more.” But he said some of the BT emails, which Reuters showed him a copy of, constituted “significant evidence” of wrongful accounting.
“EBITDA measures how much a company is earning. But to go up it needs actual income.”
Bellavia said another email, dated September 2016, in which Sebastiani says he has been told that Cameron would not accept an earnings estimate for the fiscal year 2016/17 below a certain amount, was less problematic because it could be interpreted as an aspiration and not a forecast communicated to investors.
The police report says the alleged accounting irregularities could have had an impact on the price of BT shares and this may justify adding market manipulation to the list of alleged crimes being investigated.
However, Milan prosecutors decided not to take this step on jurisdiction grounds, a source with direct knowledge of the probe said, since BT shares are listed in London and such allegations would have to be investigated by UK authorities.
Britain’s Serious Fraud Office (SFO) which investigates and prosecutes complex and often multinational fraud and corruption, declined to comment on whether it was investigating BT.
Britain’s accounting regulator, the Financial Reporting Council (FRC), said it was continuing to investigate PricewaterhouseCoopers’ (PwC) audits of BT from 2015 to 2017. BT dropped PwC as its auditor in 2017.
A spokesman for the accounting firm said it would continue to cooperate fully with the FRC in its enquiries.
(Additional reporting by Paul Sandle and Kirstin Ridley in London. Writing by Silvia Aloisi, editing by Carmel Crimmins.)