Italian accounting errors force BT to warn on 2017 and 2018 profit

By Kate Holton

LONDON (Reuters) - Britain's BT cut its revenue, earnings and free cash flow forecasts for 2017 and 2018 on Tuesday after finding that inappropriate accounting behaviour in its Italian business went far deeper than previously thought.

BT, which had revealed an initial investigation into historical accounting practices in Italy in October, said a review had found a complex set of improper sales, purchase and leasing transactions.

As a result, the size of the write down on the business has increased from the 145 million pounds ($181 million) it announced in October to around 530 million pounds.

Revenue will now not grow for the next two years while the guidance for core earnings, or earnings before interest, tax, depreciation and amortisation, has been cut to 7.6 billion pounds from a previous guidance of 7.9 billion pounds.

Normalised free cash flow for 2016/17 is expected to come in at 2.5 billion pounds, compared with a previous forecast of between 3.1 to 3.2 billion pounds. And free cash flow is also forecast to be lower than the guidance given for 2017/18.

"We are deeply disappointed with the improper practices which we have found in our Italian business," Chief Executive Gavin Patterson said.

BT also said it had seen a deterioration in its UK public sector business and international corporate markets.

($1 = 0.8019 pounds)

(Reporting by Kate Holton; editing by Guy Faulconbridge)