Internal Audit Consulting Service in Telecom Sector- Audit Report, Procedure
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.
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:
- National roaming: This is when you move from one mobile operator to another in the same country.
- International roaming: This is when you move to a foreign service provider's network.
- Within operator roaming: This is when you roam within India on the same telecom operator's network.
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:
- 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.
- 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.
- 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.
- 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.
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:
- Print Media
- Hoardings, Signage
- Electronic Media
- Sponsorship of events
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 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
- 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.
- 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.
- 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
- 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.
- 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
- 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.
- 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.
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.
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.