Can firms trust their IT suppliers' annual accounts?

The Satyam fraud and BT's announcement of a £340m write-off, raises questions about how much users can trust the accuracy of a supplier's financial accounts.

The Satyam fraud and BT's announcement of a £340m write-off, raises questions about how much users can trust the accuracy of a supplier's financial accounts.

This is not a problem confined to BT. Accountants say it is accepted practice for IT suppliers with long services and outsourcing contracts to include in their financial accounts assumptions about profits and costs over the term of the deal, say 10 years.

BT confirmed to Computer Weekly that it had made the £340m write-off because assumptions made at the outset or during the life of certain contracts turned out to have been optimistic.

He said, "It is a question of using a certain set of assumptions when working out costs, and cost savings, and the way the contract is going to work, and then finding out years later that those assumptions have proved to be not as prudent as they perhaps should have been."

Accountants may make assumptions about BT's cost savings over the life of a long contract but the expected efficiencies do not in fact materialise, he said.

In its trading update on 22 January, BT said it was reassessing estimates and assumptions associated with contracts with Swisscom, Reuters, Inbev, Credit Suisse, Nestlé, Visa, Fiat, Unilever, Procter and Gamble and the Department for Work and Pensions.

BT has yet to complete a review of its £1bn NHS contract as a local service provider to London under the NHS's £12.7bn National Programme for IT. The review could lead to further write-offs of hundreds of millions of pounds.

But if many large IT suppliers make optimistic assumptions about profits and costs in their accounts, and make huge write-offs later in the light of experience on a long contract, customers will have a right to question whether the suppliers are as profitable as they may seem from their financial accounts.

The financial solidity of a potential long-term outsourcing or services supplier is paramount. Customers, when they invite bids, usually check to ensure that potential winners will be around for a long time, and will have the cash to invest adequately in systems and services - particularly talented people. They do not want the suppliers to cut corners - fix problems slowly or spend too little on keeping up the standard of service - because they are short of cash.

In the case of BT Global Services, there may be a renegotiation of contracts with some of its major customers. There is even a possibility that BT will withdraw from its contract as supplier to the London NHS.

But even if the mistaken or unwitting overstatement of profits is widespread among large IT suppliers, and annual accounts cannot always be trusted, this is arguably not the fault of suppliers but the lax accounting regulations which should not allow companies to speculate about profits in their financial results. The government has learnt the hard way with the banking crisis the dangers of a lax regulatory regime. But accounting policies are even more lax.

A senior accountant we spoke to confirmed that users, when checking out potential suppliers for their financial solidity are, to some extent, taking a gamble when they rely on the supplier's financial accounts.

He said, "You have raised a very big and deep questionThere have been arguments for decades about how you can get accounts in the best possible shape and I don't think the arguments and discussions are finished yet."

There will undoubtedly be pressure, he said, for accounts to be tightened up. "Accounting is not an exact science. It involves assumptions, valuations and views." Suppliers need to cautious in their assessments, he said.

But BT was not always cautious.

It is possible the credit crunch will expose the weaknesses in the regulations which allow suppliers to state their profitability on the basis of speculation rather than fact.

Even now there may be IT services companies which are, on the face of it, comfortably profitable, but which are, in fact, in difficulty.

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