Italian prosecutors are investigating BT's £530 million accounting scandal

LONDON - Italian prosecutors have opened an investigation into an accounting scandal at BT's Italian branch, which knocked £7 billion off the British telecoms giant's share price on Tuesday.

Reuters reported late on Tuesday that Milan prosecutors have opened an investigation into "alleged false accounting and embezzlement." BT first announced it had discovered accounting irregularities at its Italian division three months ago, but on Tuesday radically upgraded the costs of these errors from £145 million to £530 million.

The upgrade sent BT shares crashing 20% on Tuesday. Shares are still falling on Wednesday morning on news of the Italian prosecutors' investigation. BT is down 1.1% at 8.30 a.m. GMT (3.30 a.m. ET):

Ken Odeluga, a market analyst at City Index, says in an email on Wednesday morning: "The risk of opportunistic litigation risk is rising. 'Investor alerts' by U.S. law firms calling for investors with info to come forward numbered 10 at last count.

"And whilst BT's current assessment suggests just a fraction of the Italian businesses' 1% contribution to core operating profits is involved, reputational damage is far greater."

Odeluga believes a root-and-branch management review is needed at the internet and broadcasting business. He says: "There's no evidence that Chief Executive Gavin Patterson had any inkling before last autumn of the malfeasance abroad. Although he has been in charge since 2013, and before that was BT's retail boss for five years, apparently stringent scrutiny turned up nothing for years.

"But there lies the rub. Culpability is lacking, but failure to spot the issue still puts Patterson in the frame in the eyes of many shareholders-see £7bn worth of market value destroyed on Tuesday."