Inherent Risks in International Telecommunication Industry

Describe about the Account and Auditing for International Telecommunication.

1. A business is synonymous to several risks and inherent risk is a risk that exists because of the existence of a business. In simple words, such risks will be present in a business, no matter what type of a business it is. Furthermore, these are not detectable even after employing proper audit procedures and other control programs. Such risks are diminishable to a very few extent and not on a large scale.

OneTel Ltd, an international telecommunication company, provides a broad variety of integrated goods and services all over the globe. The company highly relies on effective technology and innovation to provide services to its customers. Initially, the company was a leader player throughout Australia but as and when other network providers joined the industry, competition grew on a very large scale. Hence, when such smaller companies joined the industry, communication services and call prices became cheaper. In other words, competitive prices started ruling the telecommunication industry and more amount of competition resulted into more competitive prices and telephony services in the industry. Besides, such competition also resulted in the decline of market shares of OneTel Ltd (Gaylord, 2001). The factors that would have resulted in the assessment of inherent risks in financial reporting are:

As per the company’s financial statements, the shares were issuable in the open market. This is evident from the case when the shares rose from $355.6 million in 1999 to $1225.6 in the year 2000. In relation to the same, it is observable that inherent risks will prevail especially when heavy investments and transactions are associated. Although the system of dematerialization has facilitated in simplifying the control processes, still it fails to diminish inherent risks because of huge transactions and the complexities associated to money receipt, share allotment, and complete share issue system. Therefore, the process necessitates an enhanced assessment of inherent risk (Jones & Hensher, 2007).

As per the cash flow statement of the company, it is evident that a license transaction procured by the company in the year 2000. Furthermore, capitalization, license acquiring, amortization, and maintenance of these are a very huge procedure. In other words, an enhanced financial planning and assessment is highly needed. This also facilitates a necessity of higher assessment of inherent risk. Valuation of intangibles and their expenses are examples of some computations that require intercession of management. However, since these transactions are prone to frauds and errors, measures of risk mitigation and due care is highly needed. Therefore, as per the financial statements, the company acquires several advances and loans and as these are prone to frauds and errors, proper assessment of inherent risk becomes crucial. The company has also taken borrowings that necessitate the process of inherent risk assessment.

Assessment of Inherent Risks in Financial Reporting

Abnormal items in financial statements necessitate assessment of inherent risks in place so that mitigation can minimize their impacts. The company possesses heavy accumulated losses both at consolidated financial statement and entity stages. The maintenance and calculation of these losses is very complex that necessitate management intercession. An enhancement in the value of the company’s fixed assets is also evident, that signifies more purchase of fixed assets only by the management. In other words, discretion of management is evident operates in such a case. Hence, this highly requires proper assessment of inherent risk in place. Furthermore, strategic risks are vital to a business functioning and require care and attention regularly. Due to inappropriate decision-making or failure to implement relevant plans, such risks arise. Planning risks like share issue, acquiring of license, and shares are identifiable at the level of strategic risk evaluation. Risks from the higher level are re-assessable in the subordinate stages in the viewpoint of control risks and inherent risks.

2. As inherent risk is all about judgements, the judgement of individuals is highly relatable with the measure of risk. Control and detection risks are surpassable but what remains is that the judgement and management’s far-sightedness is very necessary for inherent risks. Such risks will prevail in the system irrespective of the strategy of risk management. However, the effects of inherent risks are highly reliable on several factors that are:

The most significant factor that plays a role towards increase in inherent risks is the presence of a huge network of different companies. In other words, the presence of such huge company network comprising of associates, subsidiaries, partnerships, joint ventures, holdings etc highly contribute towards an enhancement in inherent risks (Makela & Makela, 2009). Besides, the chances of risks are higher given such huge network of companies. As and when complexity within the management increases, abilities of the management to prevent inherent risks within the company also decrease.

Non-routine activities, abnormal items, and transactions play a key role in adding towards an enhancement in inherent risks. Abnormal activities or items necessitate adjustments and speculative activities that summons inherent risks. Furthermore, due to the management’s subjectivity, any kind of transaction that requires ideas and forecasts are exposable to inherent risks (Mak et. al, 2005). In other words, measurement and management of events and transactions in the company necessitate ideas and estimates that cannot always hold beneficial for the company.

Factors Contributing to the Increase of Inherent Risks

Another factor that facilitates towards an enhancement in inherent risk is related party transactions. This is due to the management’s subjectivity towards a transaction. Probable violations of debt covenants also play a role towards inherent risk enhancement. In the given case of OneTel, heavy loans are taken by the company and all come with debt covenants. Contravention of a company’s debt covenant can also result in consequential outcomes. Repayment of such loans together with their interest is not an easy task and a significant risk of the management’s countermand always exists. If the management exaggerates in its activity, the risk can never be discoverable or detectable. Therefore, more strong is the audit team within a company, the fragile are the risks. Moreover, the insufficiency of audit team also plays a major role towards such inherent risks in business. If an audit team is highly incompetent, then this factor also contributes towards inherent risks (Roach, 2010). Therefore, expertise, knowledge, and professionalism of audit personnel are a further requirement that detects and mitigates risks.

3. A business starts with a motive that it will assist in attaining huge revenues and will continue for an indefinite time. Therefore, any business activity that can upset this motive requires sudden action against it. The most relevant assumption of accounting is that a business must operate for an indefinite period and that too, in the most effective way. Besides, any type of event, decision, and transaction that can destroy such assumption is highly necessary to create highlight. Even the investors and other stakeholders of a company expect the business to earn consistent revenues and operate for an infinite time (Messier & Emby, 2005).

Any petty activity that can hamper the above-mentioned needs must be given due consideration because this relies on the expectation of not only the management but also the stakeholders of the company. It is crucial for the auditors and directors of the company to scrutinize these impacts through evaluation of going concern assumption. Sudden or unspecific financial crisis is far beyond any control but the prevalence of controlled measures is effective to prevent such a situation (Gay & Simnet, 2015). The factors that can hamper the assumption of going concern are failure to repay major debts, loss or withdrawal of KPI (Key managerial personnel) without replacement, signs of removal of credit assistance, inability to fulfill covenants of creditors, incapability to encounter competition, regular destruction of the company’s assets resulting into losses etc. All of these factors can result into potential erosion of the company’s finance, and its goodwill, thereby affecting the assumption of going concern within the company. In order to get rid of such a circumstance, it is the management’s duty to provide a keen interest towards the company so that frauds and errors are detectable. Some of the factors are obviously under the control of the management in such a situation but there are also factors that are far beyond the reach of the management (Livne, 2015). Immediate variations in inclinations, introduction of new goods into the market resulting into the company’s failure to survive effectively, natural calamities beyond human control, immediate failure, or destruction in market etc are few situations that play a key role in affecting the assumption of going concern of a company. However, it is notable that such a company does not have any potential control over these factors (Kedia & Philippon, 2006). Hence, there needs to be a framework that can depict to the management the seriousness of the situation and how rapidly it needs to be resolved. Therefore, an effective sign of medium, high, and low are very supportive to judge whether the situation is perfectly manageable by the management or not. These signs also help in judging whether the circumstances are grave or non-grave in nature so that the management can take a rapid action. Such strategies are also employable by most of the companies worldwide because it assists in understanding the aggregate situation of the organization (Parker et. al, 2011).

References

Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill 

Gaylord, B 2001, Liquidation of One.Tel of Australia Is Outlined, viewed 24 September 2016 https://www.nytimes.com/2001/06/06/business/liquidation-of-onetel-of-australia-is-outlined.html?_r=0

Jones, S. & Hensher, D. 2007, ‘Modelling Corporate Failure: A Multinomial Nested Logit Analysis for Unordered Outcomes’, The British Accounting Review, vol. 39, no. 1, pp. 89-107. Kedia, S. & Philippon, T. 2006, The Economics of Fraudulent Accounting, Rutgers University, USA.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 24 September  2016, https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full.

Mak, T., Deo, H. & Cooper, K. 2005, ‘Australia’s Major Corporate Collapse: Health International Holdings (HIH) Insurance ‘May the Force Be with You’, Journal of American Academy of Business, vol. 6, no. 2, pp. 104-12.

Makela, H & Nasi, S 2009, ‘Social Responsibilities of MNCs in Downsizing Operations: A Finnish Forest Sector Case Analysed from the Stakeholder, Social Contract and Legitimacy Theory Point of View’, Accounting, Auditing & Accountability Journal, vol. 23, no. 2, pp. 149-74.

Messier, W & Emby, C 2005, Auditing & Assurance Services: A systematic approach, McGraw-Hill.

Parker, L, Guthrie, J & Linacre, S 2011, The relationship between academic accounting research and professional practice, Accounting, Auditing & Accountability Journal, vol. 24, no. 1, pp. 5-14.

Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.