Human Error Leads to £500million Pension Mistake

Telecommunications giant BT says its external consultant is to blame for the latest in a string of accounting errors and scandals.

It seems that barely a week goes by without another big employer announcing a major hole in its pension provisions. The latest to do so has been BT, but the news comes with a twist in the tail, as the deficit of £3.4 billion reported at the end of June has been found to have been understated by half a billion pounds.

Every organisation relies on a solid relationship with its business accountants and auditors, and this is as much the case for the nation’s giants as it is for small businesses. Failing to pick up on an accounting scandal in Italy led to BT ending its 34 year relationship with PWC and appointing KPMG on a new deal worth £14.8 million earlier this year. After completing their final BT audit for the 2017/18 fiscal year, PWC officially handed over to KPMG, a move formally approved by shareholders at the Annual General Meeting in 2018.

The latest in a sequence of financial scandals

In October 2016, BT acknowledged that a preliminary internal investigation into accounting practices in its Italian division revealed certain accounting errors requiring reassessment. According to some reports, these violations amounted to a misstatement of around £145 million. However, an independent investigation led by KPMG and law firm Freshfields Bruckhaus Deringer revealed that the losses stemming from these errors actually amounted to £530 million.

The KPMG study also highlighted instances of collusion, circumvention of claims and other aspects of mismanagement within the Italian division of BT, which had not been identified by the lead auditor. These had resulted in the distortion of financial results for a number of years.

The audit report became a guide for corrective action, and BT management committed to improving its management systems, not just in Italy, but also in other countries. The scandal led to a number of senior employees being removed from their posts as part of the clean-up. With the scandal so fresh in everyone’s memory, this latest crisis could not have come at a worse time.

What went wrong?

According to reports in both The Times and The Daily Telegraph, BT’s Chief Financial Officer, Simon Lowth, said the latest incident was a result of “an isolated human error” in calculations made by independent actuary Willis Towers Watson (WTW). Lowth said the error represents less than one percent of BT’s total pension liabilities, which stand at about £57 billion.

BT went on to confirm that this error will not affect its income, cashflow or dividend payouts this year – this will come as a relief in some quarters, given that the Italian debacle of two years ago cost the CEO of the time some £4million in bonus payments.

A representative from Willis Towers Watson said only that it employs the most stringent of controls to ensure the accuracy of its calculations, and that this was a one-off error that has now been corrected.