BT auditor highlights IT vulnerabilities in financial reporting

BT’s external auditor, KPMG, has issued an “adverse opinion” of the telecom giant’s internal financial reporting controls in another blow to its accounting credibility.

KPMG found that BT had misstated its financial statements as a result of “material weaknesses related to general IT controls and risk assessments”.

The announcement comes three years after auditors discovered accounting irregularities in BT Italia, which wiped £530 million off the organisation’s market value.

This latest incident could be equally damaging and the consequences may well ripple out into the wider community, as organisations come to realise the effects that a negative external audit can have.

Game-changing decision

You don’t often see news stories focusing on the results of organisations’ external audits, and that’s because ‘adverse opinions’ are rare. Auditors don’t issue them lightly and when they do, finance directors and auditors committees fight hard to avoid them.

So, you can be sure that there’s no way for BT to downplay the results of this audit. Indeed, Nick Rose, a non-executive director, addressed the issue frankly in BT’s annual company report.

He stated that the weaknesses created “a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis as at or during the year ended 31 March 2020”.

Commenting on the finding, IT Governance Group Finance Director Chris Hartshorne said: “To give what KPMG have done some context, I’ve never seen a firm of auditors issue an adverse opinion over general internal controls before and neither had either of our non-executive directors when we spoke to them this week.

“What KPMG have done is a genuine game changer and all boards should be taking notice.”

Although the decision won’t have the immediate financial impact of a fine, it is a message to the shareholders and customers that the company’s failure in this area is pretty severe.

This isn’t just a case of negative press and reputational damage, though. The decision also will also affect BT’s share price, financing agreements and borrowing agreements.

The fallout of this incident in the coming months should be a wake-up call for finance directors in all organisations. “This audit report will scare them, because they’ll realise they’re reliant on non-financial people and processes in the business doing their job,” Hartshorne adds.

“It will also scare other members of the board because they’ll suddenly want to pay attention to a financial audit process they’ve previously ignored.”

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