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The account books of several major telecom companies have come under a cloud following allegations that many of them had not been paying the government a requisite share of their earnings as licence fee, by showing the revenue earned under various other heads. Consequently, on the insistence of the Telecom Regulatory Authority of India (TRAI), the Department of Telecommunications (DoT) has appointed special auditors to verify the revenue figures of some operators. tele.net speaks to telecom analysts about the role and responsibility of the regulators, statutory auditors and telecom companies in ensuring financial clarity and transparency…
Post the Satyam controversy, what role can authorities like DoT and TRAI play to ensure that telecom companies maintain greater financial transparency?
Nilangshu Katriar: Real transparency is about how useful the data is to the people who use it, rather than how much information is offered.Regulators like DoT and TRAI may play an important role in terms of ensuring that the various financial and non-financial information presented by the telecom companies to stock exchanges, investors, analysts, regulators, etc., are at best reconciled amongst the same. Also, non-GAAP (generally accepted accounting principles) financial figures such as average revenue per user presented by telecom companies, need to be reconciled with the most directly comparable GAAP financial data.
Sridhar Pai:
- Monitor the deals signed between telecom companies for their true values.
- Monitor the parent company’s financial health and the health of its subsidiaries.
- Use financial analysis tools like Z score for predicting bankruptcy.
- Study the model under which the Indian operations are incorporated into the overall balance sheet.
Romal Shetty: There is a thin line between mathematical error and wilful misdemeanour. This is what DoT is about to unearth having realised that there are billing and datarelated errors in India’s hyper-growth telecom industry.
Though TRAI and DoT have been active in defining regulations and implementing them, they need to reach the next level in activism, in managing and ensuring appropriate regulatory compliance.
Taking a cue from other industries, regulators in the western world spend a significant amount of time at corporate locations to understand and preempt “innovations” in tax evasion and other regulatory charges. Our regulators too need to spend time and effort in working with companies to understand revenue and other systems so that the government is not short-changed.
Obviously, these studies should be done with a cooperative mindset and this can be achieved only when there is no fear of severe punitive action against non-compliant companies.
Given the amount of licence fee at stake, the regulators are on the right path by appointing additional auditors to ensure accuracy in licence fee charges. However, telecom companies are always going to be ahead of the curve with innovations in financial engineering and sheer speed of change in telecom technologies.
Auditors are not likely to maintain their pace of learning with telecom companies. Auditors cannot rely on their traditional knowledge of accounting and finance; they need to penetrate new knowledge areas. In this effort, they need to work along with telecom technology specialists to truly understand and analysehow technology can affect accounting and finance practices. With constant changes in technology, it takes very little for auditors and companies to arrive at the incorrect conclusion with shareholders, consumers and the government, who could thus be staring at massive losses in wealth, as well as in trust and confidence.
It is essential that auditors, companies and regulators constantly interact on various forums to maintain a balanced approach to financial engineering, entrepreneurship and regulatory compliance.
Mahesh Uppal: In a sector like telecom, given its immense size and large number of players, the only way rules will work is if they are robust and simple. Any attempt at complexity always backfires because the sector now offers a multitude of services, accounting or defining all of which is beyond the ability of most experts, let alone bureaucrats.
While there is no limit to the number of services, there are also several different ways of achieving the same function. For instance, one can use the internet or voice telephony to make a call; one can access similar services by SMS, email or some other internet medium. Similarly, multiple technologies can be used (fixed and wireless) for the same services. The permutations and combinations are endless and unless we keep the rules simple, we will have a tough time managing them.
There cannot really be a foolproof way of auditing records of operators. In such a situation, it is best if the rules are extremely simple, various taxes and fees are not complicated and where the various heads are unambiguously defined so that the scope for confusion is minimised. The rules in telecom should not be technology independent and as far as possible, not even function independent.
As long as it pays to abuse rules, people will abuse them. So the authorities have to remove those incentives.
Do telecom companies have enough filters in place to safeguard the companies’ overall interest against malpractices?
Nilangshu Katriar: Telecom companies are plagued by the constant need to perform a balancing actbetween focusing on network rollout, customer acquisition, network management and compliance on the one hand, and factoring in the risk of loss on account of frauds from subscribers, dealers, partners, etc. on the other While most of these companies have robust revenue assurance processes, the risk of malpractices is still high, though perceived to be within manageable limits.
Further, telecom financial reporting systems are intermeshed across various external networks ?? retail points of sale, cash collection agencies and banks. There are also many costing pitfalls ranging from billing inaccuracies to complicated rate structures, and different accounting norms to cash collection patterns.
All of these put a strain on the enterprise. While most companies have evolved and have enough filters in place, there is still room to bring in controls to safeguard their overall interests.
Sridhar Pai: Most large telecom operators in India are listed as private limited companies and form a part of the parent company that abides by the law of the state/country where it is headquartered. Their operations, therefore, fall within the purview of the country in which they are headquartered, leaving little scope for local monitoring.
Romal Shetty: Considering the complexity of the Saytam scandal, many people in the public domain may fear further such scandals. Many people are of the view that corporate governance in India is practiced in name only. An improvement in this image should safeguard the interests of consumers, regulators, the government and shareholders.
A strong, knowledgeable and independent board of directors is an important indicator of how well corporate governance is followed in a company. Directors not only need to have financial knowledge but also a strong understanding of technology.
Along with an independent board, it is essential to have various risk oversight groups within the company that serve as advisors to the management and the board and are capable of raising red flags. Across other industries as well, we have seen that strong internal risk oversight groups have been crucial in helping companies prevent and overcome grave corporate challenges.
From corporate governance and regulatory governance points of view, it is essential that the various filters are checked once in a while through special audits and independent reviews. But history shows that however tight a system is, there will always be a few leaks and cracks that are uncontrollable.
Mahesh Uppal: Probably yes, because we have not seen a major crash till date. Unlike IT, telecom is almost entirely metered. And the metering in telecom is much more difficult to fudge. For example, the system that meters how many minutes of calls have been made is virtually impossible to fudge.
However, telecom fees in India are charged in a manner similar to taxes. As a result, the room for revenue fudging is considerable, as is the incentive to fudge, considering the billions in revenues that we are talking of here.
What steps can be taken to improve transparency levels?
Nilangshu Katriar: To provide timely, meaningful and reliable disclosures relating to the companies’ financial performance, one has to focus on standardising accounting norms and policies. There should be specific GAAP literature that considers the peculiarities of the telecom industry and enables consistent accounting practices across companies.
There is also a need for standard reporting definitions for all non-GAAP measures and reconciliation of all the financial information presented to different stakeholders.
It is also essential to ensure that the measures introduced are not too draconian since operators are required to provide significant information and reports to authorities.
Lastly, the regulatory environment, licence fee, spectrum fee computation, etc. have to be made simpler so that reporting pressures do not force companies to resort to unfair means.
Sridhar Pai: All telecom companies should release the balance sheets of their Indian operations to enable transparency.
If conflicts arise between the financial reporting between a company’s headquarters and its Indian operations, DoT, TRAI and other regulatory bodies have to resolve the same with the regulatory bodies abroad.
The reasons for granting a deal to a particular telecom company should be made public and the criteria used and weightage allotted clearly stated to ensure that government deals are being given to deserving companies.
A telecom company’s accounts should be audited by two independent bodies and in case of any discrepancy, a public notice should be issued.
Growth should be closely monitored to ensure that investments from anti-social source(s) do not flow into the company.
Bidding for resources should be made online. Patents and similar intangible assets should be monitored to ensure that infringements, if any, by the company are noticed, as this could directly affect the bottomline in terms of compensations paid out and lawsuit settlements.
Romal Shetty: For greater transparency, it is essential that telecom companies simplify the way they disclose revenues, while regulators simplify the way licensee fees are computed. Providing clear guidelines would help the government in earning its fair share of revenues from licence fees. Telecom companies need to de-mystify their corporate structures so that regulators do not end up going through reams of papers only to be distrustful of any information provided.
The fact that companies, the government and regulators really do not see trust in each others’ eyes is a major deterrent for transparency and openness. Companies fear over-regulation and taxes, while regulators fear consumers being misled and corporate greed taking over, whereas the government fears that they are being short-changed and any decrease in revenue collection would be termed as corruption or corporate influence by the public and media. Drawing everybody closer to a national objective would gain support from all and trust levels would obviously increase.
Mahesh Uppal: Transparency in a sector like telecommunications is about simplicity. However, transparency by itself is not enough. Transparency can be taken to nightmarish levels. The issue, therefore, is not transparency. It is transparency that is manageable and that is only possible if there is an attempt not just to make things transparent but to simplify them.
What are the international best practices in this area?
Nilangshu Katriar: To make financial transparency effective, there are three E’s that need to be followed. These are enforcement, examination and education.
Romal Shetty: The role and placement of TRAI in the regulatory framework is key to how regulatory governance places itself in the industry. TRAI is largely seen as a toothless tiger stuck between the government and telecom companies. In many instances, the recommendations of the regulator have been just recommendations rather than being serious actions from the government.
Most telecom regulators across the world enjoy a high degree of independence and perform a powerful balancing act either against industry lobbies or government intrusion in industry.
Balancing consumer, regulatory and corporate interests can only be done through an independent regulator that also has the ability to enforce its policy. Though the Federal Communications Commission (USA) and Ofcom (UK) follow different regulatory models, they are also seen as leading regulators across the world.
Mahesh Uppal: y and large, most western economies run at a much higher level of transparency. Government and commercial processes are more integrated, so monitoring becomes easy. Bureaucratic intrusion is also far less and a black economy is virtually non-existent.
It is the political economy in India that needs to be addressed. We need a nationwide e-governance network. The e-governance network will create an internal check mechanism that will allow for any kind of abuse or misuse of the system to be identified on time.
