One.Tel Case

Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern Assessment

Nature of the Entity's Business

One.Tel was launched in Sydney, Australia in May 1995. They were described as a global telecommunications company offering a fully integrated product list including low-cost international and national calls, Internet services, prepaid and post paid calling cards plus GSM mobile phone services. Their strategies as customer-focused and dedicated to providing innovative, quality telecommunication services at reduced prices. Details of total revenue by geographic segment for the year ended 30 June 20001 are as follows:

The Industry

Australia's telecommunications infrastructure with a fully digitised network is as sophisticated and as modern as any in the world. Land based phone lines penetrate about 96 per cent of all households, with 2 million Internet subscribers and over 7 million Internet users. Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra's market share is around 57 per cent, Optus 31 per cent and Vodafone 11 per cent. (Source: US Department of State FY2001 Country Commercial Guide)

Prior to the deregulation of Australia's telecommunications industry on 1 July 1997, there were two carriers. There are now 35 carriers who are often former service providers and are generally reliant upon leasing network capacity from Telstra, although some are developing their own switching and network capability.

The influx of smaller carriers into the telephony market has acted as one of the major developments in producing important competitive results in the deregulated market. These carriers typically provide international and long-distance calls and, more recently, complete telephony services. The growth in revenue does not correspond directly with growth in the number of telecommunication service providers due to greater market competition, reduced prices, and lower revenue per company.

Telstra, the former monopoly carrier, is the dominant provider of Australia's land-based telephony service. This network has nearly 10 million connections and an annual growth rate of five per cent. Telstra still dominates the telecommunications environment although its market share has dropped significantly in recent years.

Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra's market share is around 57 per cent, Optus 31 per cent, and Vodafone 11 per cent.

Management

The Board of One.Tel comprised nine members, including five non-executive directors and four executive directors. Due to the rapid growth of the industry described in the previous section significant managerial experience in the industry was limited. The functions of the board included:

i. approval of corporate strategy, and financial plans;
ii. identifying and addressing areas of significant risk facing the company;
iii. reviewing and monitoring management processes and reporting mechanisms;
iv. monitoring financial performance;
v. Appointment of the senior management team.2

Financial Statements

BALANCE SHEETS AT 30 JUNE 2000

FINANCIAL STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2000

PROFIT AND LOSS STATEMENTS FOR THE YEAR ENDED 30 JUNE 2000

Discussion Questions

1. List and discuss several factors that would have contributed to an increased inherent risk assessment at the financial report level. Also identify which of these factors may be identified during the strategic business risk assessment.

2. List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.

3. Do you believe that the area of going concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision.

References:- 6 Harvard