Internal Audit Consulting Service in Telecom Sector- Audit Report, Procedure

Updated on April 08, 2024 10:56:28 AM

Internal audit plays a very important role within the telecommunications industry, ensuring the financial health and regulatory compliance of organisations operating in this rapidly evolving sector. It is a critical function that meticulously evaluates and monitors financial processes, risk management, and adherence to industry-specific regulations. Serving as a diligent guardian, internal audit scrutinises the integrity of financial transactions, safeguards sensitive customer data, and assesses the efficiency of operational procedures.

In a landscape where connectivity and technological progress are of utmost importance, internal audit stands as a fundamental component, reinforcing the sector's infrastructure, enhancing its reputation for reliability, and fostering a climate of trust in an era defined by seamless communication and cutting-edge technology.

The telecommunications industry is a complex and ever-changing industry, so It is vital for telecom companies to have effective internal auditing procedures in place. Internal auditing for the telecommunications sector can be beneficial to companies in identifying and mitigating risks, improving efficiency, and ensuring compliance with laws and regulations.

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Regulatory Framework in Telecommunication Sector

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Step 1:Licence Requirement

The Ministry of Communications and Information Technology, Government of India is responsible for regulating the telecom industry through the Telecom Regulatory Authority of India (TRAI).

The telecom industry is regulated by TRAI through licensing requirements. A licence is the only requirement for a telecom company to provide services in telecom circles.

Step 2:Fees

In accordance with the Financial terms and conditions of the licence agreement, a telecom operator is required to pay the following fees:

Entry Fees: One time fees required to be paid by an operator before signing the agreement. At present the entry fees for National Long Distance (NLD)/ International Long Distance (ILD) Licence is Rs. 2.50 Crore each.

Licence Fees: Apart from entry fee, a licensee is also required to pay licence fee on quarterly basis in form of revenue share at the prescribed rate on the Adjusted Gross Revenue (AGR)

Licence fee varies based on the type of service and classification of telecom circles prescribed by TRAI from time to time.

Licence fee for NLD/ILD is 6% of AGR for each service and for V-SAT/ Internet Telephony is 6% of AGR. R. NLD /ILD and VSAT Licences are on an all India basis. AGR includes installations, late fees, sale proceeds of handsets, revenue on interest, dividend, value added service, supplementary services, access or intercommunication charges, roaming charges, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, etc.

Step 3:Radio Spectrum Requirement

The required amount of fees to be paid for the use of radio frequencies on the basis of specified percentage of AGR as per the prescribed details by the Wireless Planning and Coordination Wing (WPC) of DoT. In accordance with the estimated AGR, the Spectrum Charges must be paid in advance on a quarterly basis within 15 days of the beginning of the relevant quarter.

Step 4:Calculation of Interest/ Penalty on Delayed Payments

The main DOT licence agreement has the same terms and conditions for levying penalty interest for delayed payments. However, for the time being the work of computation of interest/penalty/short payment etc. will continue to be done by the DOT and any demands on this account will be raised only by DOT.

Step 5: Metering and Billing Audit

Quality of Service (Code of Practice for Metering and Billing Accuracy) Regulation 2006 has set benchmarks for metering and billing. The salient features of Code are as follow:-

  • TRAI will receive compliance reports from the telecom company on a yearly basis.
  • It is necessary to ensure that all charges are in accordance with the published tariff that applies to the user.
  • Telecom service providers are required to provide customers with written detailed information about the tariff plan within a week of activation of the service.
  • Value-added services must disclose charges before customer selection.
  • Postpaid cash payments are credited immediately, and cheque payments are processed within a reasonable time.
  • Prepaid top-up credits are applied within 15 minutes.
  • The telecom company shall submit the compliance code of practices adopted by TRAI on a yearly basis.

Step 6: Quality of Service Parameters (QoS)

Telecom Regulatory Authority of India has prescribed quality of services parameters for various Basic Wireline and Wireless, and Cellular Mobile Telephone Services (CMTS) e.g. provision of telephone, fault repair, grade of services, call completion rate, etc.

The internal auditors must become familiar with these parameters, analyse the relevant data, and report any adverse features observed to management.

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Revenue Recognition in Telecommunication Sector

A revenue assurance review covers the processes related to CDR generation, processing, rate plan configuration, billing, and rating for prepaid, postpaid, roaming, IUC, and VAS revenue streams. CDR is a record of a single call that contains information such as caller number, duration, origin, and destination.

Postpaid Service Revenue

Postpaid services revenue recognition is consistent and based on the accepted principle. The internal auditor must ensure that rental charges are correctly apportioned.

Prepaid Service Revenue

Prepaid service revenue can be divided into three segments: service/administrative charges, service tax, and talk time. The government is required to pay service tax for selling recharge vouchers to dealers/distributors. Revenue recognition practices for administration charges and talk time vary among telecom companies.

The internal auditor should verify the accounting policies adopted by the entity.

Registration Processing and Activation Charges

Charges are levied at the time of acquisition. The recognition of revenue occurs either when the customer activates the service or during the estimated customer relationship period, whichever is earlier.

Credit Control

Telecom companies enforce credit control policies to limit exposure to postpaid subscribers, ensure 100% collection of dues, and establish documents and approval for credit limits. The credit limit for each subscriber is determined by their tariff plan, usage, payment history, and creditworthiness. The credit limit is constantly upgraded and communicated to the customer.

The internal auditor is responsible for verifying the telecom company's credit policy and dunning processes for effectiveness.

Revenue from Roaming

Roaming means being able to use your mobile phone outside of your home network. This can be done in the same country (national roaming) or in a foreign country (international roaming).

Types of roaming:

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IT Control and Assessment in Telecommunication Sector

Telecommunication industry is a service based industry that can provide services to its customers through the well-configured and synchronised technical as well as commercial systems.

Some specific IT infrastructure related issue are discussed below:

  1. Scalability of the Systems: The need for robust IT infrastructure that can be scalable to support future growth and volume is highlighted due to the high rate of growth and volume of transactions.
  2. Synchronization of Various IT Systems: Telecom companies deploy various systems and applications for customer creation, activation, service provision, billing, collection, accounting, and MIS reports generation, etc. If the systems are not synchronized, different results will be displayed for the same query. While conducting Internal audit in the Telecommunication Sector, the internal auditor must verify the synchronization between various systems.
  3. Sufficiency of Information: To design and market new and innovative schemes, the IT infrastructure needs to be structured in a way that provides access to customer behavior and spending data and ensures that it generates sufficient revenue.
  4. Security of Information: To maintain confidentiality of the information and to avoid misuse of information, the security of data is critical. There should be proper administration of granting access by the creation of user ID and proper password which can’t be hacked easily. Internal auditor double-checked that these authorizations are not being misused.
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Distribution and Market Expenses in Telecom Sector

The growth of telecom is directly proportional to the dealer’s network. It provides a variety of incentives/ commissions to the dealers/ channel partners to acquire more business for telecom companies.

The channel partner’s expenses such as customer acquisition commission, sales incentive, and collecting commission form a substantial part of selling and distributing expenses.

The internal auditor should verify the existence and effectiveness of the processes/database for making various payments to channel partners.

Other Marketing Expenses

For marketing, the services and products are carried in the following ways:

The advertisements on hoardings are displayed at various location sites for a contracted perio

Broadcast/ display of advertisement for agreed time slot.Internal auditor has to verify the methods and process to monitor these expenses, keeping in mind the concern areas.

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Fraud and its types

Fraud in the telecom industry may be described as any service obtained without intention of paying. Fraud is constantly evolving, as per an estimate, there are more than 200 types of telecom frauds that exist and are rising continuously. Some of the frauds and risks are discussed below:

External Fraud

  1. Subscription Fraud: Subscription fraud may be of two types. The first step in obtaining a connection is to provide fraudulent documents/information. Secondly, after providing the correct documents, a customer uses the network to make NLD/ILD and roaming calls. By paying bills, they increase their credit limit and make a lot of long-distance calls without any intention of paying.
  2. Illegal Telephone Exchanges: In order to bypass the PSTN, fraudsters use VoIP to receive international calls from foreign countries and forward them to desired destinations within the country.
  3. Cloning of Handsets and SIM Cards: The act of cloning involves copying the phone's unique identifiers to another phone, which makes it appear to be the original. The telecom company charges the original customer for the calls, even though they did not make them. This can lead to financial losses for the telecom company.
  4. Credit Card Fraud: A fraudster can use a third party's credit card to make payment to a telecom company, and the telecom company may lose money if the credit card company charges back the amount.
  5. Premium Rate/ Value Added Services related frauds: Telecom firms offer premium rate numbers for value-added services. Content providers' revenue is based on the number of calls, so they may attempt to inflate call numbers by using fraudulent means.

Internal Fraud

  1. Dealer Fraud: Telecom firms assign dealers to acquire customers and collect bills. They are encouraged to make new connections and penalised for missing targets. Some dealers may falsify documents or delay deposits in order to maximise their income.
  2. Wrong Configuration in Operating Systems: Telecom companies configure data in operating systems to generate bills. Employees can modify data to commit fraud, such as not generating CDRs or changing tariff plans. This can be detected by monitoring tariff plan configurations and billing system reports.

Telecom Related Business Risks

The Telecom industry in India is exposed to various business related risks due to following reasons:

  • Due to the large subscriber base, there is a lot of data being generated and handled.
  • The cost of collecting revenue is higher because the revenue per subscriber is very low.
  • The ability to stay ahead of innovative technologies is hindered by the fast changing nature of technology.
  • The subscriber base is spread geographically.

Fraud Assessment

The Internal auditor needs to acquistant himself with the Entity’s Risk Management plan undertaken by the company and monitor whether the telecom company is taking actions as per the risk mitigation plans. One should critically examine the reports and verify internal controls implemented by the company to prevent credit card frauds, Cloning of Handset and Sim Cards related frauds.

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Other Issues faced by Telecom Industry

Recharge Voucher Management

Major revenue of the telecom industry is generated from sales of Prepaid Recharge Vouchers. The internal auditor while auditing in the telecom industry should be conversant with complex prepaid billing systems and various interfaces that the billing system has with other network systems.

E-Recharge

This is a way of loading balance in the customer’s account electronically without any use of a voucher. In this case, there should be a proper link between the system that facilitates the electronic uploads, systems, wherein the stocks has been maintained and the financial system, wherein the money has been entered. The internal auditor needs to ensure that there is a proper control over the E-Recharge process and there is a system of reconciliation between the stocks as per electronic system and stock as per financial system.

Card Related Issues

The Indian cellular industry has also faced double taxation issues in case of activation charges and the sale of price of SIM cards. Sales tax authorities calculate the price of SIM cards based on the fact that the activation procedure was an incidental part of the sale. Hence, the activation charges formed a part of sales and were thus liable for Sale Tax.

Refund of Deposit to Customers

Customers give deposits for services, which are refunded by cheque/DD after adjusting unpaid bills and usage charges. Cash refunds and unissued cheques are major concerns, as they can lead to fraud and customer dissatisfaction.

Recovery of Handsets & Customer Premises equipments (CPEs)

One of the major challenges in the telecom industry is the recovery of company owned handsets and other equipment lying at the premises of the customer after the termination of subscriber connection. Internal auditor should verify proper controls for recovery of customer premises equipment after termination of the connection and there are measures in place to impose a penalty for not surrendering the CPEs.

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Conclusion

In conclusion, Internal auditing in the Telecommunication sector plays a vital role in bringing transparency, efficiency and compliance with industry regulations. Examination of financial records, expenses, operational processes, and risk management strategies are included while auditing. As the telecommunication industry is evolving rapidly, the importance of internal auditing practices remains paramount for maintaining trust, competitiveness, and long-term success.

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FAQs on Internal Audit in the Telecom Industry

Who conducts internal audits in the telecommunications sector?

The telecom company typically uses certified internal auditors or audit teams to conduct internal audits, who are independent and report their findings to management and stakeholders.

What are common areas of focus for internal audits in telecommunications?

Revenue assurance, expense management, network security, customer billing, regulatory compliance, vendor contracts, and data privacy are all areas that are common.

Why is internal auditing important in telecommunications?

Operational inefficiencies, fraud, and other issues can be identified through internal auditing.

How can internal auditing help telecom companies manage risks?

Internal audits are designed to evaluate risk management practices and assist companies in identifying, assessing, and mitigating risks related to technology, operations, and regulatory changes.

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