ARCHIVED -  Telecom Decision CRTC 97-3

Telecom Decision

Ottawa, 25 February 1997

Telecom Decision CRTC 97-3

AT&T CANADA - CONTRIBUTION ACCOUNTING AND REPORTING PRACTICES

I BACKGROUND

By letter dated 14 November 1994, BC TEL filed an application regarding the accounting and reporting practices of AT&T Canada Long Distance Services Company (AT&T Canada) (formerly Unitel Communications Company) with respect to contribution payable on cross-border circuits. BC TEL stated that, during its review of the levels of contribution paid by AT&T Canada, it found that AT&T Canada had apparently kept two sets of books for the months of December 1993 and January, February and March 1994. Further, BC TEL alleged that AT&T Canada 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 AT&T Canada's accounting and reporting practices and, if appropriate, order an independent audit of AT&T Canada's contribution records and a technical audit of AT&T Canada's cross-border facilities in order to determine whether or not AT&T Canada's contribution obligations had been accurately reported.

In Unitel Communications Inc. - Contribution Accounting and Reporting Practices, Telecom Decision CRTC 95-18, 24 August 1995 (Decision 95-18), the Commission directed AT&T Canada to file with the Commission a complete audit plan for its accounting and reporting practices, serving copies on BC TEL, Bell Canada (Bell), Teleglobe Canada Inc. (Teleglobe) and TELUS Communications Inc. (TCI) (formerly AGT Limited) (the companies). The Commission stated that, among other things, in the audit plan AT&T Canada was to nominate an independent external auditor, other than its current external auditor, to perform the financial audit, and to nominate 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.

On 2 October 1995, AT&T Canada filed its proposed audit plan and nominated Ernst & Young as the financial auditor, and Pacomm Consulting Inc. (Pacomm) as the technical auditor.

By letter dated 12 January 1996, the Commission issued additional directions to AT&T Canada regarding the filing of its proposed audit plan. The Commission directed AT&T Canada to (1) expand the scope of the audit from one to three months, (2) provide recommendations regarding any follow-up control procedures considered necessary, and (3) comply with the requirement in Decision 95-18 with respect to the level of detail required for company billing. By the same letter, the Commission accepted the nomination of Ernst & Young as the financial auditor and, among other things, directed Ernst & Young to state that it was not bound or otherwise restricted to perform the audit procedures proposed in AT&T Canada's submission and that any additional audit procedures that Ernst & Young deemed necessary would be performed.

On 6 September 1996, AT&T Canada filed its audit reports comprised of the five following areas: Control Procedures, Prior Disclosed Errors, Billing Requirements, Follow-up Procedures, and Technical Audit.

The companies, other than Teleglobe, filed comments to which AT&T Canada filed reply comments.

II AUDIT REPORTS

A. Control Procedures Report

The Control Procedures report identified four key internal control procedures for the reporting mechanisms in place for tracking cross-border circuits that either attract or are exempt from contribution.

Ernst & Young provided an unqualified report to AT&T Canada stating that the company's control procedures were suitably designed and operated effectively during the period audited.

Bell submitted that the monthly review of circuits classified as contribution exempt should be documented and signed off by the appropriate supervisory personnel in the Traffic Department.

BC TEL submitted that (1) on-going changes in AT&T Canada personnel and organizational structure may affect its ability to maintain its control procedures, thus follow-up audits are required, (2) with respect to the annual reconciliation of trunk groups connected to voice switches with underlying trunk data, it was not clear whether it had been substantively tested by the auditors given that they had only audited a three-month period, and (3) there was no comment from the auditors on whether access privileges to computers and programs are issued only to appropriate personnel based on their responsibilities.

TCI noted that the wording in the audit report stated that AT&T Canada's control procedures "provide reasonable, but not absolute, assurance".

In response to Bell's comments, AT&T Canada stated that the monthly review of contribution exempt status is carried out under the direction of the Senior Manager of the Traffic Department.

In response to BC TEL's comments, AT&T Canada stated that the operation of the internal control procedures should be independent of the personnel involved and that it has improved the documentation which is the basis for training, guidance and reference. AT&T Canada also confirmed that the auditors were able to substantially test annual reconciliations and that access privileges are issued only to specific personnel.

In response to TCI's comments, AT&T Canada stated that the wording used is that recommended by the Canadian Institute of Chartered Accountants.

With respect to the "reasonable assurance" point raised by TCI, the Commission notes that, normally, control procedures do not provide absolute assurance because the costs of such control procedures may far exceed the benefits. Further, the Commission agrees with AT&T Canada that the wording used is appropriate.

With respect to changes in structure and personnel, the Commission notes that the audit was done during a period of significant organizational change for the company but that the auditors, nonetheless, issued an unqualified report.

The Commission notes that, except for the items noted above, interveners were generally satisfied with the control procedures in place.

In light of the above, the Commission is of the view that AT&T Canada appears to have developed and implemented adequate control procedures to restore the integrity of AT&T Canada's accounting and reporting practices and that the proper corrective and control procedures appear to have been established to ensure the system can be relied upon in the future. In the circumstances, the Commission accepts Ernst & Young's report.

B. Prior Disclosed Errors Report

The Prior Disclosed Errors report dealt with the underpayment of contribution during the four-month period identified in Decision 95-18.

Bell and TCI stated that because the auditors were unable to conduct a complete and comprehensive audit of the prior disclosed errors, the accuracy of AT&T Canada's error report was not verified and parties would not know for certain if all the errors were caught and the number of cross-border circuits were accurately reported.

TCI noted Ernst & Young's statement that no adjustment for late payment charges was calculated because the company's tariff pages did not include a prescribed interest rate for the calculation of late payment charges. TCI submitted that a full and complete audit should include a verification of the calculation of late payment charges, as prescribed by TCI's Terms of Service, based on the interest rate shown on the monthly invoices remitted to AT&T Canada. TCI submitted that the Commission should direct that such audit reports be presented to AT&T Canada's internal management, with copies provided to the Commission and TCI.

Bell noted that, while Ernst & Young had stated that adjustments to the late payment charges may be applicable, the report did not provide the detailed calculations used to determine the proposed adjustment. Bell submitted that, until it has reviewed the detailed calculations with AT&T Canada, such estimates should be treated as preliminary pending final verification of the figures.

AT&T Canada acknowledged that the auditors were unable to perform certain procedures, due mainly to the fact that the audit was conducted on a retroactive basis involving periods dating back to 1994. However, AT&T Canada submitted that reasonable steps had been taken to confirm the accuracy of the reported prior errors and that the company has complied with the directives in Decision 95-18. Further, AT&T Canada noted that the audit had confirmed that all corrective procedures were currently in place.

AT&T Canada submitted that the tariff pages in effect for TCI during the relevant period do not set out a rate of interest for late payment charges. AT&T Canada also stated that the late payment charges payable to Bell were calculated in accordance with Bell's tariffs at the applicable interest rate per month and that this calculation is clearly discernible from the schedules attached to the auditor's report.

The Commission agrees with all parties that the level of the prior disclosed errors cannot be precisely verified because it is impossible to physically check the number of circuits used in a past period. In addition, the Commission notes that an audit to determine further undiscovered and unreported adjustments is outside the scope of the audit process set out in Decision 95-18, and, in any event, the costs of such an audit would likely exceed any benefits.

The Commission finds that the companies are responsible for verifying their own records in order to determine the appropriate amounts owed. The Commission considers that all late payments submitted to the companies by AT&T Canada are preliminary, pending the companies' verification of the time period and applicable interest rates on the amounts owed.

The companies are directed to present to AT&T Canada, within 30 days of this Decision, their calculations of the late payments owed to them by AT&T Canada along with a remittance of overpayment or an invoice for underpayment.

C. Billing Requirements Report

The Billing Requirements report dealt with the format, content, and verification of the Cross-Border Tracking report provided by AT&T Canada to the Stentor Resource Centre Inc. (Stentor) companies.

In the Billing Requirements report, Ernst & Young recommended that the Cross-Border Tracking report be signed by the Vice-President rather than by AT&T Canada's internal auditor who is also the company employee responsible for preparing the report.

Bell submitted that an officer of the company should sign the Cross-Border Tracking report and that the absence of relevant detailed information prevents Bell from conducting a satisfactory evaluation of the data, or from tracking the data on an ongoing basis.

In response, AT&T Canada stated that due to the small number of officers of the company, requiring an officer's signature may unduly delay the issuance of the Cross-Border Tracking report. AT&T Canada submitted that having the Vice-President responsible for reviewing and approving contribution payments sign the report provides a sufficiently high level check. AT&T Canada stated that, while billing details relating to resellers is beyond the scope of the current audit, it is, nevertheless, reformatting the reports that it receives from resellers to achieve a consistent report format.

In the circumstances, the Commission accepts Ernst & Young's recommendation that the Vice-President responsible for reviewing and approving contribution payments sign the Cross-Border Tracking report.

The Commission notes that the scope of the audit was limited to contribution payments relating to cross-border circuits and did not include resold or shared circuits. As noted, AT&T Canada is in the process of reformatting the reports that it receives from resellers. The Commission considers that these reports will be helpful to all parties. AT&T Canada and Stentor are directed to finalize, within 60 days, the format of the monthly reports for contribution payments attributed to resold or shared circuits.

D. Follow-up Procedures Report

The Follow-up Procedures report dealt with the procedures considered necessary to provide assurance that, in the future, AT&T Canada complies with appropriate accounting and reporting practices relating to contribution.

Ernst & Young proposed, and AT&T Canada agreed, with the following recommendations: (1) relevant departments would notify internal audit of any changes to the contribution billing process, (2) internal audit would examine such changes at least quarterly and make recommendations when required, (3) at least annually, as long as a self-reporting requirement exists for cross-border contribution, AT&T Canada's Internal Audit Department should be required to conduct an evaluation of the internal control procedures relating to cross-border facilities that attract contribution and those that are exempt from contribution and the company's financial processes regarding the calculation, reporting and payment of contribution, (4) in the first instance of such internal control evaluation, the plan, the working papers and the results would be reviewed by an independent auditor (AT&T Canada agreed to have Ernst & Young conduct such a review), (5) the Vice-President Accounting and Budget and the Senior Vice-President and Chief Financial Officer should review and approve the plans for the internal control evaluation and review and approve the results and recommendations made by the Internal Audit Committee, (6) the Director of Internal Audit would report annually to the Audit Committee, and (7) Internal Audit personnel would have unrestricted access to personnel, documents and the records necessary for their reviews.

Bell and TCI submitted that an annual external review is necessary and should be mandated by the Commission, and that a report of the review should be presented to AT&T Canada's Audit Committee. TCI added that the report should be presented to the Commission and the companies. On the other hand, if an internal audit were the choice of the Commission, Bell supported the involvement of Ernst & Young for the first year.

BC TEL noted that the report is silent on the size and expertise of AT&T Canada's Internal Audit Department and on the role and nature of the follow-up audit. BC TEL stated that the auditors need to clarify or address these issues and also provide a follow-up audit report to the Commission before the integrity of the contribution reporting practices at issue can be said to have been satisfactorily restored.

In response to BC TEL's submission, AT&T Canada stated that the size and expertise of the Internal Audit Department were not within the scope of the review. AT&T Canada noted, however, that Ernst & Young had confirmed the composition of the Department prior to making the recommendation that future reviews be conducted by that Department. AT&T Canada submitted that the auditor would not have made such a recommendation if it had concerns about the ability of the company's Department to conduct such a review. AT&T Canada also noted that Ernst & Young would participate in the first internal audit conducted by the Department.

AT&T Canada submitted that the audit demonstrates that the integrity of its internal control process has been restored.

With respect to the comments made by the companies, the Commission is of the view that an annual external review is excessive and it is not necessary that the Commission and the companies receive a report every year. Further, the Commission considers that the recommendations of Ernst & Young when implemented, offer reasonable assurance that sufficient control is maintained.

In Decision 95-18, the Commission stated that following a review of the audit results it would determine whether any further action would be required. The Commission accepts the follow-up procedures recommended by Ernst & Young with the following change: AT&T Canada is directed to file with the Commission Ernst & Young's report with respect to the next annual internal review (covering a period of at least three months), serving copies on the companies. The companies may file comments within 30 days of the receipt of the report. AT&T Canada may file reply comments serving a copy on the companies within 15 days of receipt of the companies' comments.

E. Technical Audit Report

AT&T Canada filed the Technical Audit report prepared by Pacomm to address the risk that the data used to calculate contribution on cross-border circuits is incomplete or otherwise inaccurate.

The companies did not comment on this report.

The Commission notes that Pacomm was of the opinion that AT&T Canada's inventory records provide a complete representation of the actual DS-3 cross-border circuits. Further, the Commission notes that Pacomm found no evidence of the existence of cross-border transmission facilities other than those identified in the inventory data provided by AT&T Canada. In the circumstances, the Commission accepts Pacomm's report.

III CONCLUSIONS

In Decision 95-18, the Commission noted that information filed by AT&T Canada in that proceeding indicated that AT&T Canada owed, at that time, $6.24 million. However, the Commission notes that this figure was overestimated. Based on this audit, the Commission finds that, during the four-month period identified in Decision 95-18, AT&T Canada owed approximately $5.6 million to the companies.

In addition, the Commission finds that, on a preliminary basis, based on the audit, the integrity of AT&T Canada's accounting and reporting practices for contribution payable on cross-border circuits has been restored and that the proper corrective and control procedures have been established to ensure that the system can be relied upon in the future. The Commission will make its final determination following a review of the evidence to be provided in the public process initiated in Part II, Section D above.

Allan J. Darling
Secretary General

DEC97-3_0