Updated on July 06, 2024 11:46:10 PM
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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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.
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.
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.
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.
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:-
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.
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:
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:
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.
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
Internal Fraud
Telecom Related Business Risks
The Telecom industry in India is exposed to various business related risks due to following reasons:
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.
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.
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.
At Professional Utilities, we leverage our industry knowledge and expertise to help businesses navigate complex regulations, minimize risks, and optimize operations for maximum efficiency and profitability.
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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.
Revenue assurance, expense management, network security, customer billing, regulatory compliance, vendor contracts, and data privacy are all areas that are common.
Operational inefficiencies, fraud, and other issues can be identified through internal auditing.
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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