Severn Trent rejects £75m fraud claim

The water company Severn Trent has launched a disciplinary investigation after an investigation by its auditors revealed evidence of behaviour that fell "short of the high standards" expected of its employees.

The company made the admission yesterday in response to claims by David Donnelly, its income and debt reporting manager, who alleges that the company deceived the industry watchdog Ofwat to cover up a £75m discrepancy in its figures.

But Severn Trent said in a statement yesterday: "Having reviewed the results of the investigation, the board has concluded that these issues have had no effect upon the integrity of the group's accounts and that water customers have not been overcharged."

Ofwat is looking into whether Severn Trent's three million customers have been overcharged and said the company could be forced to pay compensation through rebates or lower water bills in the future, if the allegations were found to be true.

The investigation comes as a major embarrassment to Robert Walker, the outgoing chief executive, who has been expected to be named soon as the new chairman of WH Smith, the retailer. Mr Walker is due to retire in February.

Mr Donnelly alleged the accounting fraud began in 1999, and claims that customers were overcharged by £50m over the past two years. He claims he was asked to inflate Severn Trent's bad debts to justify price increases. "The figures going in were supposed to be untouched by human hand. I knew they were not because I had tinkered with them on the instructions of my bosses," he told a Sunday newspaper. "The penny dropped. I grappled with the fact that I was party to a huge fraud."

Severn Trent denied the detail of Mr Donnelly's claims, but it admitted an employee had raised allegations with the company in May relating to accounting and regulatory returns to Ofwat. It appointed forensic accountants from PricewaterhouseCoopers to conduct an independent investigation.

Ofwat was immediately informed of the investigation, kept continually updated and was subsequently provided with PwC's findings at the end of September, Severn Trent said. Its statement yesterday said: "Notwithstanding the above, the investigation revealed prima facie evidence of some behaviour that the board believes falls short of the high standards its expects from employees. Accordingly, a disciplinary investigation has been instigated and other action is being taken as necessary."

According to Mr Donnelly, Severn Trent's regulatory department drew up forecasts for income and costs on which Ofwat was to base its decision for price increases over the next five years. He said because the regulatory department did not consult the finance department, an error was made, resulting in a £75m discrepancy between the two. Mr Donnelly said the company decided to hide the mistake, and his role was to massage the figures to make Severn Trent's profits look lower than they were to justify price rises.

Ofwat said it was "carefully" studying the findings of the PwC investigation passed to it by Severn Trent in September.

Ofwat said the allegations will not affect its 2 December announcement on the final price limits for Severn Trent over the next five years, but if overcharging is proved, the money could be clawed back later.

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