BT Italian fraud crisis

First it was a black hole in Tesco’s finances, now BT has a serious issue with “Factoring and Leasing” transactions in its Italian operation. These are only two examples of specialist and exotic financial transactions employed by major organisations - to do what? Make the books look better? Hide losses? Achieve the local management’s KPIs? In both examples the organisations have stated integrity principles:

•  To view Tesco code of conduct click here
• To view BT business practice policy click here

So what can we infer from what has been reported? In both cases, the dubious practices were not new, they had been in place for several years. Clearly the managers of the departments knew of them and managed them as active revenue reporting practices. Clearly Internal Audit has reviewed these practices and confirmed that they were operating correctly in accordance with internal policies and standard accounting practices.  Clearly  external auditors, generally the Big4, have provided a detailed and expensive audit and given corporate governance a clean bill of health. So what went wrong?

Hypothetically and historically, external advisers and consultants have provided mechanisms, legal at the point of conception, to enable organisations to report their finances in the best possible way. Legal companies such as Mossack Fonseca have provided advice to avoid tax by hiding assets offshore and through numerous shell companies. If the practices were designed to overstate profits why didn’t the internal and external audit checks and balances pick these up? Were they complicit, negligent, or just not experienced enough?

As a counter-fraud consultant, I see organisations relying on their internal and external auditors to give them a clean bill of health while missing the obvious problems. Undoubtedly, something is wrong and it requires senior managers to think outside the box and adopt a different approach to the standard “box ticking” audits. Our approach would be to disregard the policies, follow the transactions and money and identify and quantify potential discrepancies. We do this from the perspective of breaking the system before the police or financial regulators do.

By Richard Kusnierz