Reference no: EM131211639 , Length: word count:2000

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:

Country	$M	%
Australia	429.4	64
UK	144.7	21
France	15.1	2
Netherlands	36.6	5
Hong Kong	39.2	6
Other	13.2	2
Total	678.2

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

		Consolidated		Parent Entity
	Note	2000	1999	2000	1999
		$M	$M	$M	$M
	CURRENT ASSETS
Cash	25	335.7	172.6	164.2	170.8
Receivables	9	218.4	72.0	104.0	58.9
Inventories	10	5.1	2.5	4.5	1.8
Other	11	68.9	49.1	50.8	35.3
TOTAL CURRENT ASSETS		628.1	296.2	323.5	266.8
NON CURRENT ASSETS
Investments	12	-	-	26.0	17.1
Receivables	9	-	2.9	356.7	62.0
Plant and equipment	14	155.7	41.0	85.9	28.1
Intangibles	15	559.8	28.0	522.3	-
Other	11	91.9	157.9	71.1	132.3
TOTAL NON CURRENT ASSETS		807.4	229.8	1062.0	239.5
TOTAL ASSETS		1,435.5	526.0	1,385.5	506.3
CURRENT LIABILITIES
Accounts payable	16	277.2	73.0	115.5	50.4
Borrowings	17	92.2	7.2	20.2	7.2
Provisions	18	5.8	4.7	5.2	4.4
TOTAL CURRENT LIABILITIES		375.2	84.9	140.9	62.0
NON CURRENT LIABILITIES
Accounts payable	16	-	-	2.3	1.2
Borrowings	17	107.3	62.9	80.5	62.9
Provisions	18	8.2	15.2	8.1	14.6
TOTAL NON CURRENT LIABILITIES		115.5	78.1	90.9	78.7
TOTAL LIABILITIES		490.7	163.0	231.8	140.7
NET ASSETS		944.8	363.0	1,153.7	365.6
SHAREHOLDERS' EQUITY
Share capital	19	1,225.6	355.6	1,225.6	355.6
Convertible notes	17	0.1	3.7	0.1	3.7
Retained profits/(accumulated losses)		(282.1)	9.1	(68.7)	9.6
Reserves	20	1.2	(5.4)	(3.3)	(3.3)
TOTAL SHAREHOLDERS' EQUITY		944.8	363.0	1,153.7	365.6

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

		Consolidated		Parent Entity
	Note	2000	1999	2000	1999
		$M	$M	$M	$M
CASH      FLOW      FROM      OPERATING
ACTIVITIES
Receipts from customers		510.9	300.1	283.3	250.2
Payments to suppliers and employees		(684.8)	(328.1)	(327.4)	(250.2)
Interest received		16.9	1.9	11.1	1.9
Interest and other borrowing costs paid		(11.9)	(3.5)	(7.5)	(3.5)
Income tax refunded		-	0.7	-	0.7
Net cash used by operating activities	25	(168.9)	(28.9)	(40.5)	(0.9)
CASH FLOW FROM INVESTING
ACTIVITIES
Proceeds from sale of investments		-	1.6	-	1.6
Proceeds from sale of plant and equipment		-	19.2	-	19.2
Payment for plant and equipment		(87.5)	(34.0)	(32.3)	(20.0)
Purchase of licences		(525.6)	(9.5)	(523.1)	-
Purchase of Controlled Entities		-	(6.9)	-	(6.9)
Payment of deferred consideration		(1.8)	-	(1.8)	-
Loans provided to wholly owned entities		-	-	(264.4)	(53.8)
Loans provided to other parties		-	(2.6)	-	(2.6)
Net cash used by investing activities		(614.9)	(32.2)	(821.6)	(62.5)
CASH FLOW FROM FINANCING
ACTIVITIES
Proceeds from issue of shares		818.5	280.3	818.5	280.3
Proceeds from borrowings		139.8	59.0	50.0	59.0
Finance lease principal repayments		(11.2)	(4.2)	(11.2)	(4.2)
Dividends paid		(1.8)	(2.5)	(1.8)	(2.5)
Share buy-back		-	(106.4)	-	(106.4)
Net cash provided by financing activities		945.3	226.2	855.5	226.2
Net increase in cash held		161.5	165.1	(6.6)	162.8
Cash and cash equivalents at beginning of year		172.6	8.4	170.8	8.0
Exchange rate adjustment		1.6	(0.9)	-	-
Cash and cash equivalents at end of year	25	335.7	172.6	164.2	170.8

PROFIT AND LOSS STATEMENTS FOR THE YEAR ENDED 30 JUNE 2000

		Consolidated		Parent Entity
Eamings/(loss) before depreciation,amortisation,	Note	2000 $M	1999 $M	2000 $M	1999 $M
interest, abnormal items and income tax		(230.4)	25.2	(57.3)	24.7
Depreciation and amortisation	2	(35.3)	(12.3)	(26.6)	(9.8)
Net interest (expense)/revenue and other borrowing costs	2	3.3	(1.6)	4.3	(1.6)
Operating profit/(loss) before abnormal items and income tax		(262.4)	11.3	(79.6)	13.3
Abnormal items	4	(33.5)	(1.4)	(5.4)	(1.4)
Operating profit/(loss) before income tax Income tax (expense)/benefit attributable to operating profit/loss	2     3	(295.9)     4.8	9.9     (2.9)	(85.0)     6.8	11.9     (4.0)
Operating profit/(loss) after income tax Retained profits at the beginning of the financial year		(291.1)     9.1	7.0     5.1	(78.2),     9.6	7.9     4.7
Total available for appropriation		(282.0)	12.1	(68.6)	12.6
Dividends provided for or paid	7	0.1	3.0	0.1	3.0
Retained profits/(accumulated losses) at the end of the financial year		(282.1)	9.1	(68.7)	9.6

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