Audit of Telecommunications Companies

Revenue Recognition:

 In general, revenue is always recognised upon completion of the provision of services. However, there are certain services for which money is collected in advance and the provision of services are deferred, making it is difficult to allocate the revenue over the period of service. In the absence of standard industry guidelines, there is no clarity on the recognition of certain revenue. If the service provided is a postpaid service, the recognition of revenue is simpler and is recognised by the companies more or less in accordance with the recognised principle of revenue recognition of revenue.

  If the service provided is a prepaid service, the revenue from the prepaid service revenue (recharge vouchers) can be divided into three segments, namely a) service/administration charges or fees, b) service tax payable to the government and c) talk time and internet quota available to the subscriber.

Service tax payable to the government is paid at the time of sale of recharge vouchers to the Dealers or Distributors as well as to the end customers. For other revenues, different revenue recognition practices are followed by different telecom companies. The internal auditor should satisfy himself that the accounting policies applied by the company in respect of revenue recognition have been consistently followed.

 Registration, Processing and Activation Charges are charged to the customer at the time of acquisition. Revenue is generally recognised either immediately or when the services are activated by the customer, or on a staggered basis and amortised over the estimated period of the customer relationship.

 When recognising revenue in connection with the “lifetime validity” offer, various factors included in the offer must be taken into account. Even if the offer mentions the period “during the validity of the licensed period”, there is a possibility that the licensed period may be extended. It has been shown that prepaid customers tend to cancel within 18 to 24 months. In legal terms, therefore, the services are to be offered for life; in practice, the services are offered for a period of 18 to 24 months and extended accordingly.

Network security:

Every non-network call (i.e. calls to another operator’s network) must be routed through a “Point of Interaction” (POI) as per the guidelines of TELECOM REGULATORY AUTHORITY OF INDIA. In order to reach the POI, port and other charges are to be paid to the other telecom operator as mutually agreed within the overall cap fixed by the TELECOM REGULATORY AUTHORITY OF INDIA. The structure is as follows: a) Port charges b) Active connection charges c) Passive connection charges.

 Each telecom company shall have the right to request an interconnection point against prepayment of charges on an annual basis subject to the cap fixed by the TELECOM REGULATORY AUTHORITY OF INDIA. All telecom companies are bound by the regulation to provide a port to other companies on request and on payment of port charges, subject to availability of ports, sufficient traffic and technical feasibility.

 In addition to the port charges, a telecom company has to pay active charges to BSNL. These are the connections of licensed telecom service providers for which transmission equipment of the service provider is installed in BSNL exchanges and their network is connected through it. The infrastructure rental charges in this case have been streamlined and are as follows: a) Building space sharing charges b) Electricity and other charges c) Tower sharing charges d) Conduit sharing charges.

The National Telecom Policy of 1999 requires telecom companies to have access to telephone service even in rural areas. Since BSNL was the sole provider of services in rural areas and its revenues were not sufficient to cover its fixed costs, Access Deficit Charges (ADC) were introduced by TRAI from May 1, 2003 for a limited period to give incumbents time to revamp tariffs during a transition period.