Over the last few years, India has witnessed enviable growth in its economy, even in the face of the global slowdown. The telecom industry specifically has had a big role to play in the progress that has been made by the country. The Indian telecom sector has been one of the fastest growing in the world. With the total telephone subscriber base reaching 601 million at the end of February 2010 from 582 million in January 2010, thereby reaching a growth rate of 3.22%, India is projected to become the second largest telecom market globally.
While the telecom sector is able to boast the fastest growth trajectories with changing economic conditions worldwide and an evolving technological environment, the complexity of the telecommunications industry and challenges for growth are under scrutiny.
Telecom companies have a high number of external touch points like subscribers, channel partners, service providers and regulators. Simultaneously, they have to deal with acute competition, the demands of rapid growth and consistently maintaining high levels of customer satisfaction. In this context, the industry is subject to a number of fraud risks such as subscriber (documentation) frauds, unauthorised use of its network, leakage of sensitive information, accounting and reporting irregularities, lack of oversight and challenges associated with internal or external misconduct investigations.
Telecom fraud has been identified as the single biggest cause of revenue loss for telecommunication providers with figures averaging between 1% and 3% of operator?s annual revenues. The top three sources of leakages have been identified as configuration changes in any of the network elements, new product development and tariff configuration, and poor system integration from MSC-IN-mediation-billing systems. Telecommunication fraud is set to rise further with the advent of new services such as 3G and Voice over Internet Protocol (VoIP).
Leakage (including fraud-related) across the revenue chain remains a challenge for operators. While operators in developing markets face a wide range of issues including the upfront challenge of high revenue leakages, operators in developed markets are faced with insufficient data to accurately identify and recover most of the estimated leakages. A common perception across the industry is that developing markets face higher revenue leakage than developed markets due to rapid growth and the fast pace of technological changes.
Telecommunications fraud is a growing problem all over the world and one needs to be extremely watchful since these can be found in all types of voice networks. The motivation in most cases is to gain access to services without paying the relevant cost or to get money (call selling?subscription fraud) by providing services to other people using infrastructures with wrong identification (identity theft).
Tracking fraud is critical?the telecom value chain has numerous fraud vulnerabilities, both internal and external. Employees at times provide additional services directly in the network, thereby avoiding billing or selling confidential information (internal fraud). Most of the frauds are always focused on avoiding payments in some way?obtaining fraudulent credits, bypassing international gateway by using VoIP resulting in theft as well, call back fraud which deprives the operator of revenue from outgoing international calls, etc.
External factors such as dealer frauds?where connections are sold to customers to reach targets and obtain higher commissions, manipulation of network elements or simple frauds such as manual topups to the customer balance are situations that are extremely common.
In the telecom industry, products usually offered by companies can be categorised as phone-related or Internet related. An emerging trend is for companies to ?bundle? cable, television and Internet and wireless services in one contract, ie. ?bundled Contract?. Telecom companies could bundle services together and sell them to a customer?for instance, Internet TV with a broadband connection. This allows companies to inflate their sales by including fictitious components in a bundled sale contract whereas actual sale of some of the products that are shown as part of a bundled contract have not taken place or will not take place. One way to prevent such a situation is to implement proper controls pertaining to the timing of recognition of revenue based on delivery of services.
Telecom companies find several ways to boost their sales volume as companies exchange the indefeasible rights of use on their fiber-optic networks to other telecommunication companies (this practice is known in the industry as ?capacity swaps?). These transactions are sometimes booked as income, even though the swaps generate no net cash for either company.
It has become imperative for auditors to look for transactions with any other telecom player which has been recorded in the books of account. These could be potential round tripping transactions, especially if such transactions are entered with related parties. Due to the intricacy involved in the telecom space, the general recommendation for telecom companies is to employ independent valuers or consultants as well as conduct regular independent special reviews to assess and test all factors.
Thus, as one can see, the world has seen the tremendous success of the Indian telecommunication industry , but there is another side to it where companies find several ways to ?workaround? policies. There is no doubt, however, that this sector has displayed enormous potential and will continue to play an important role in developing the country?s economy. But for the country to benefit, some discrepancies need to be corrected.
The writer is the head, forensic services, KPMG in India. Views are personal