MILAN (Reuters) - Three employees of BT Group’s Italian unit warned their Madrid-based supervisor in November 2015 about possible accounting problems at BT Italy, one of the three said, a year before the phone company revealed financial irregularities at the division.

FILE PHOTO: The logo of BT is seen outside the headquarters in Milan, Italy January 24, 2017. REUTERS/Stefano Rellandini/File Photo

The source’s disclosure, on condition of anonymity because Italian prosecutors are investigating the matter, raises questions about how promptly BT began investigating an accounting scam that has cost it 530 million pounds ($670 million) and hit its share price.

BT, one of Britain’s oldest companies, said last October it had discovered “inappropriate management behavior” and “historical accounting errors” at its Italy unit, taking a 145 million pounds write-down. In January, it said in a statement it had identified improper accounting at BT Italy and expanded the write-down to a total of around 530 million pounds.

BT Chief Executive Gavin Patterson told reporters at the time that BT could not have detected the problem sooner because Italian managers kept their London bosses in the dark. BT did not say how it believed managers were involved in this deception. Reuters was unable to verify BT’s allegation.

The source told Reuters that he and two BT Italy colleagues had met the head of European sales, Jacinto Cavestany, on the sidelines of a company gathering in Munich in November 2015. The three told the sales chief that they were worried something was wrong with the unit’s financial results, though they did not provide evidence, the source said.

They also complained to Cavestany of bullying by local management, especially then BT Italy Chief Executive Gianluca Cimini, and of pressure to meet tough bonus targets, the source said. The source added that the sales chief had replied that the three should help him to steer Cimini “in the right direction”.

BT said in response to questions by Reuters that it began an internal investigation after receiving allegations in late summer 2016 of “inappropriate behavior” at BT Italy - almost a year after the Munich meeting. It did not specify the allegations or say exactly when the probe began.

Contacted by Reuters, Cavestany referred questions to BT. The company said in an email that “Jacinto has no recollection of these issues being raised with him at the conference”.

Cimini, in an email to Reuters, denied allegations of bullying. In relation to alleged financial irregularities, he said he knew of no illegal behavior and that BT Italy’s accounts were verified by head office during his time as CEO.

BT declined to say exactly when it uncovered irregularities. “BT became aware of the financial irregularities after receiving allegations of inappropriate behavior in late summer 2016. This led to us carrying out an initial investigation of the alleged conduct as we announced in October,” it told Reuters.

As a listed firm, BT is obliged to make timely disclosure of price-sensitive information. BT’s shares fell 20 percent when it made its January disclosure on improper accounting at BT Italy.

BT has publicly disclosed that it uncovered a complex set of improper sales, leasing transactions and factoring. Factoring is a way in which firms sell future income to financiers for cash.

BT also said in response to Reuters’ questions that it had received complaints of what it called bullying at BT Italy earlier in 2016. It said senior company representatives had visited the Italian business and looked into the issue.

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According to a person familiar with BT’s internal investigation, the probe - codenamed Project Crane - began as an inquiry into bullying and interviewed about 40 employees. It concluded that Italian management had been responsible for “bullying and inappropriate behavior”, according to a one-page summary of the findings reviewed by Reuters. It was not clear from the summary what the “inappropriate behavior” referred to.

During or as a result of Project Crane, BT uncovered financial irregularities, current and former employees of BT said. BT then hired auditor KPMG to look at the irregularities. Neither the Project Crane report nor KPMG report has been released.

In the United States, several BT shareholders have filed class-action lawsuits alleging the group misled investors and failed to promptly disclose the financial irregularities.

In a suit filed by Rosen Law Firm on Jan. 25, a shareholder claims BT had failed to disclose improper accounting that was either known to the company or “recklessly disregarded by them” for four years until their first disclosure in October 2016.

Rosen Law Firm spokesman Noel Chandonnet said the lawsuit would show that BT lacked effective internal controls.

FAKING SALES

The source involved in the Munich meeting, as well as four current employees not involved in that meeting, also laid out for the first time certain details of how they say the deception worked.

The five sources said a network of people in the Italy unit had exaggerated revenues from certain BT-installed phone lines, faked contract renewals and invoices and invented bogus supplier transactions in order to meet bonus targets and disguise the unit’s true financial performance. All of these practices had been going on since at least 2013, they added.

Two sources familiar with the KPMG report said it had found these same types of irregularities.

For example, BT Italy earned income from toll-free hotlines provided to corporate clients. This income varied according to how much traffic a hotline carried: the busier the line, the more money a client paid to BT Italy.

According to four of the sources, client-account managers exaggerated hotline traffic by misstating them in internal records. They did this in order to meet aggressive internal targets and collect their bonuses, they added.

Clients were unaware of the deception and only paid revenues due on the actual traffic recorded, they said.

BT Italy’s purchasing office also colluded to mask the true state of the business, making fake purchase orders to suppliers with no intention of receiving goods, four sources said. Reuters was unable to determine if any of the suppliers was aware of the scheme.

No cash changed hands, but BT Italy would suddenly cancel the order and ask the supplier to issue a credit note by way of a refund, these sources said. Some bogus credit notes were then sold to a factoring company for cash, said one of the sources, a current client-account manager at BT.

One current employee said multiple internal accounting systems, a legacy of BT acquisitions in Italy, enabled staff to inflate revenues by entering two duplicate invoices for the same client. The genuine invoices were entered into one system and mailed to clients; the duplicates went into another system, according to this source.

A source familiar with the prosecutors’ investigation said the accounts of the former and current employees matched the prosecutors’ findings on the practice of faking income.

BT annual reports show it examined Italy’s risk controls in 2013 and 2014. It said in its 2014 report that the unit had made significant progress to improve its control environment.

BULLYING

The deception took place in an atmosphere in which employees were criticized and shouted at by a few top managers in front of colleagues for failing to meet targets, all five BT Italy sources said.

They said the pressure to hit targets rose after Cimini became the unit’s chief executive in April 2013. He was formerly its chief financial officer.

For example, the current BT Italy client-account manager said his 2016-17 goals, set early last year, require him to more than double overall revenues from his clients.

In a staff meeting in Milan, one eyewitness source said, Cimini spoke about the need to meet targets and demonstrated how no employee was indispensable. He dipped a finger into a glass of water and remarked: “What happens if I put my finger inside and take it out? Absolutely nothing - the same if you left the company.”

Cimini denied this incident took place.

“The episodes of mobbing (bullying) that were reported (to Reuters) are absolute fantasy and falsehood, but evidently the sources can invent and speak of stuff they know nothing about when they think they are protected by anonymity,” he said.

BT suspended Cimini and some other managers late last year after its internal inquiry. It did not disclose the reason for their suspensions. The five BT sources offered no evidence that Cimini knew of the deception.

Cimini said in his emailed comments to Reuters that the most recent company survey on BT Italy’s internal environment showed it was one of the best workplaces in Europe. Reuters could not verify this. BT declined to comment on employee surveys across different lines of business.