ARCHIVED -  Telecom Decision CRTC 95-18

Telecom Decision

Ottawa, 24 August 1995

Telecom Decision CRTC 95-18

UNITEL COMMUNICATIONS INC. - CONTRIBUTION ACCOUNTING AND REPORTING PRACTICES

I BC TEL'S APPLICATION

By letter dated 14 November 1994, BC TEL filed an application regarding the accounting and reporting practices of Unitel Communications Inc. (Unitel) with respect to contribution payable on cross-border circuits. BC TEL stated that, during its review of the levels of contribution paid by Unitel, it found that Unitel had apparently kept two sets of books for the months of December 1993 and January, February and March 1994. Further, BC TEL alleged that Unitel had filed records with the company that under-reported the quantity of its cross-border circuits.

BC TEL requested that the Commission initiate an investigation into Unitel's accounting and reporting practices and, if the Commission considers it appropriate, order an independent audit of Unitel's contribution records and a technical audit of Unitel's cross-border facilities in order to determine whether or not Unitel's contribution obligations have been accurately reported.

II POSITIONS OF PARTIES

By letter dated 14 December 1994, Unitel maintained that it has acted in good faith in all of its transactions relating to cross-border traffic and contribution.

Unitel stated that, as a result of BC TEL's application, Unitel had conducted a thorough internal investigation of its reporting on the number of cross-border circuits and amounts of contribution payable in BC TEL territory from October 1993 until May 1994. Unitel's investigation confirmed that all reports match exactly, with the exception of the four month period from December 1993 to March 1994, wherein a discrepancy of $102,332 in contribution payable had been found. Unitel stated that it had forwarded this amount to BC TEL.

Based on its investigation, Unitel stated that the error was caused by a few employees responsible for the administration of cross-border contribution, who had acted without the authority or knowledge of senior management. Unitel indicated that it had established new procedures to verify reports on cross-border circuits, prior to presenting them to the telephone company.

Unitel stated that, in light of the discrepancy discovered in contribution owing to BC TEL, it had also conducted an investigation of contribution payable on cross-border circuits in Bell Canada (Bell) territory from October 1993 until May 1994. Unitel indicated that its investigation revealed that all reports match exactly, with the exception of the same four month period from December 1993 to March 1994. Unitel stated that it had owed Bell $210,586 and had forwarded this amount to Bell. Unitel stated that it had also established specific measures, identical to those implemented with regard to BC TEL, to prevent any discrepancies in the future. Unitel stated that the discrepancies are not on-going and exist only with respect to cross-border contribution for the months of December 1993 to March 1994 in the territories of BC TEL and Bell.

Unitel requested that the Commission deny BC TEL's request for an investigation into Unitel's accounting and reporting practices and rule that a technical audit of Unitel's cross-border facilities is neither warranted nor necessary.

In its reply of 21 December 1994, BC TEL noted that Unitel had not indicated an intention to pay the late payment charges due on the above-mentioned sums (Unitel subsequently remitted these sums).

BC TEL stated that the nature of the reporting structure established by the Commission for cross-border contribution relies on the good faith of all parties. BC TEL submitted that, under the present circumstances, it was not able to accept at face value assurances by Unitel either that the problem exists only with regard to the four months identified by BC TEL, or that it will not arise in the future.

BC TEL noted that Unitel had provided no details concerning the steps it had taken to review the facts presented by BC TEL, nor had it indicated how this situation could have arisen and lasted for any period of time. BC TEL stated that Unitel had not explained why these "falsified" accounts began to be prepared in December 1993 or why they ceased to be prepared after March 1994. Further, BC TEL submitted that Unitel had provided no information that would assist BC TEL and the Commission in evaluating whether Unitel's current procedures are sufficient to prevent a re-occurrence of this situation.

BC TEL maintained that the Commission should initiate an investigation into Unitel's accounting and reporting practices, including an independent audit of Unitel's records. BC TEL submitted that Unitel should also file a description of the enforcement measures and sanctions put in place to convey the seriousness of this issue to its employees.

III INTERROGATORY PROCESS

On 16 February 1995, the Commission addressed eight interrogatories to Unitel. In its responses, Unitel indicated that, in addition to the incidents referred to above, it had under-reported and underpaid almost $5 million to AGT Limited (AGT), BC TEL, Bell and Teleglobe Canada Inc. (Teleglobe). Unitel also stated that it had been overly aggressive in its interpretation of the rules concerning contribution charges and that some underpayments were caused by errors in calculations. Unitel reiterated that it has put policies in place to correct the company's procedures. The measures included verification of all contribution reports by Unitel's internal audit department, the institution of separate in-depth financial and technical audits of contribution fees and long distance circuits to be conducted yearly, and the holding of internal sessions with employees to remind them of proper reporting procedures and the consequences of misrepresentation. Unitel stated that it would provide additional audits if directed by the Commission.

In comments dated 13 April 1995, BC TEL stated that Unitel's description of the steps taken to convey the seriousness of this issue to its employees are generally appropriate. However, BC TEL submitted that the serious internal problems revealed by Unitel's interrogatory responses provide overwhelming evidence that a thorough independent audit by a third party must be conducted on Unitel's operations. Given the serious internal control problems evidenced by Unitel's responses, BC TEL considered that, at least in the near term, Unitel's contribution reporting should, at minimum, be supported by an affidavit. However, BC TEL submitted that only a full and independent audit and the subsequent specification of adequate controls can restore confidence in the reporting system at issue.

BC TEL submitted that it does not appear that Unitel has internal controls to permit it to identify errors when they occur, or that it will take any steps to rectify these errors when they are identified, except at the insistence of third parties.

In comments dated 18 April 1995, Bell submitted that Unitel's contribution reporting procedures have not been subject to adequate scrutiny or auditing procedures to ensure compliance with the contribution regime. Bell stated that the magnitude of the discrepancies in payments, exceeding $5.2 million revealed to date, stands in stark contrast to Unitel's continued assurances that the contribution rules were being correctly applied.

Bell submitted that, in order to restore the integrity of the present contribution regime, Unitel's newly established internal management controls regarding the contribution regime must be subject to a vigorous audit by an independent third party. Bell also stated that the irregularity of Unitel's reports to the company and the limited detail included does not provide it with sufficient information to substantiate and validate its bill to Unitel. Bell submitted that, in light of Unitel's ongoing unwillingness to address this issue with Bell, the Commission should require Unitel to provide detailed monthly reports that fully substantiate the basis for its contribution payments. Bell stated that it is prepared to meet with Unitel staff to discuss these requirements.

IV CONCLUSIONS

The Commission notes that information filed by Unitel in this proceeding indicates that Unitel has paid to date $6.24 million, comprising under-reported contribution, Goods and Services Tax and late payment charges to AGT, BC TEL, Bell and Teleglobe.

The Commission considers that the monthly contribution reporting mechanism relies on the good faith of all parties to be effective. In the circumstances, the Commission is of the view that independent financial and technical audits are required to restore the integrity of Unitel's contribution reporting practices.

Accordingly, the Commission directs Unitel to provide for the Commission's approval, by 25 September 1995, a complete audit plan as requested by the Commission in interrogatories 4 and 5 of its 16 February 1995 interrogatories to Unitel, serving copies on AGT, Bell, BC TEL, and Teleglobe (the companies). This plan should include the following:

(1) a detailed description of all activities to be undertaken; the audit should confirm that all corrective procedures are currently in corrective place and that the system can be relied upon in the future;

(2) a proposed schedule for the completion of each activity identified;

(3) the proposed date when the final report will be completed; and

(4) the nomination of an independent external auditor, other than Unitel's current external auditor, to perform the financial audit, and the nomination of an independent professional engineer to perform the technical audit to verify the installed, working, and spare capacities on the routes identified in the financial audit.

More specifically, the audits are to examine the following:

(1) the reporting mechanisms in place for tracking facilities that attract contribution and those that are exempt from contribution;

(2) the methods used to verify and report on a monthly basis all cross-border facilities owned or leased by Unitel, including unused facilities;

(3) all the instances raised in this proceeding in which errors have occurred, including detailed calculations of the contribution errors, with supporting technical and financial information;

(4) Unitel's financial processes regarding the calculation, reporting and payment of contribution; and

(5) the level of detail to be provided to the companies and to any other carriers to which Unitel pays contribution, recognizing their need to bill and to verify, to the extent possible, the accuracy of the inputs to this billing.

The companies may file comments with the Commission respecting Unitel's audit plan, serving a copy on Unitel, within 15 days of its receipt. Unitel may file a reply to the companies' comments, serving copies on the companies, within 15 days of their receipt.

When the audits have been completed in accordance with the plan approved by the Commission, Unitel is to submit the audit reports to the Commission, serving copies on the companies. The companies may file comments with the Commission on the reports within 30 days of receipt, serving copies on Unitel. Unitel may file its reply within 15 days of receiving the companies' comments.

Following the Commission's review of the audit results and of the comments of the companies and Unitel, the Commission will determine whether any further action is required.

Allan J. Darling
Secretary General