Water giant accused of fraud

WATER giant Severn Trent is today accused of a five-year accounting fraud that fleeced its 3m customers and deceived the industry watchdog to cover up a £75m discrepancy in its accounts.

A long-serving senior employee, who says he was forced to collude in the deception, claims the company systematically pulled the wool over the eyes of industry watchdog Ofwat so that it could overcharge consumers, Financial Mail can reveal.

The alleged fraud, which also involved falsifying corporate accounts and lying to external auditor PriceWaterhouseCoopers, began in 1999, according to David Donnelly, income and debt reporting manager at Severn Trent.

He said the company's regulatory department drew up forecasts for income and costs on which regulator Ofwat was to base its decision for price increases for the next five years.

Donnelly said a vital error was made - the regulatory department did not liaise with the finance department and there was a £75m discrepancy between the two.

But instead of accepting the error and taking the hit to profits that would have resulted from Ofwat granting lower price rises, the decision was taken to hide the blunder.

Donnelly's role was to carry out accounting tricks to make the company profits look lower than they really were and justify price rises.

He claims the overcharging amounted to £50m over the past two years - almost £17 for each Severn Trent customer.

Following a complaint to managers by Donnelly, John Tracey, head of forensic accounting for PriceWaterhouseCoopers, began an investigation.

Severn Trent, chaired by David Arculus, opposite, has admitted to Financial Mail that it passed PWC's findings to Ofwat, but said: 'Severn Trent has concluded that these issues have had no effect on the integrity of the accounts and customers have not been affected.'

The company, whose overall profits were £441 million last year, confirmed that names had been removed from the report following legal advice. 'We have a duty of confidentiality to our employees,' a spokesman said.

Ofwat said that the report was received in September. After two months, the regulator said it was still 'carefully considering' the contents. 'We met Mr Donnelly last week and we are considering what he told us,' a spokesman said.