BT has issued a profit warning for the next two years after financial irregularities were discovered in its Italian operating arm.
The Italian operation is part of BT's Global Services division and provides network services to businesses. It was created by an cquisition of local companies and until 2005 was run as a joint venture between BT and local providers, including Mediaset which is controlled by former prime minister Silvio Berlusconi.
In September, BT began an internal investigation along with KPMG into accounting issues at the division and on Tuesday it announced that "the extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified".
As a result of its investigation BT upped its estimated losses from "improper accounting practices" at the division from £145m to £530m. At the same time it issued a profit warning, saying that gross earnings for 2017 and 2018 in the core business are likely to be down £175m for each year.
BT suspended two senior executives in its Italian division last year as it the internal investigation into false accounting practices began. New executives have since been appointed to replace them.The telecoms giant has warned that the irregularities may not be an isolated case and says it is carrying out investigations in other divisions.
"We are deeply disappointed with the improper practices which we have found in our Italian business," said CEO Gavin Patterson.
"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."
The news shocked the markets on Tuesday, knocking 20 per cent - or about £8bn - off the value of BT's shares.
The Italian accounting scandal is not the only reason for the lower estimated profits. BT has also factored in the probability of major customers not renewing their contracts in a stagnant marketplace. BT, which last year spent £12.5bn acquiring EE, also faces a large a pension deficit and has been forced to spend money defending itself against calls that it should be broken up.
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