Public consultation on a draft ERG
Opinion on proposed changes to the Commission Recommendation on
Accounting separation and cost accounting
Submission of KPMG Comments
As an audit firm, KPMG Paris is very interested in the accounting separation and cost
accounting issues, as we have been performing a wide range of assignments on numerous
operators’ cost accounting systems for about ten years.
Some information about us : the KPMG Paris office is the leading office within KPMG Europe
for the audit of Telecommunications Operators cost-accounting systems. Our credentials in the
Telecommunications industry are as follows:
Since 1993, we have been working with the French Telecommunications Regulator (“ART”) on
the audit of France Telecom’s cost accounting system. The following assignments have been
? Critical review of France Telecom’s cost accounting system for leased lines in relation
to the implementation in France of the ONP-leased line directive;
? Critical review of France Telecom’s cost accounting system for public telephony in
relation with the liberalisation of the French market and the implementation in France
of the ONP-voice telephony directive. This engagement resulted in a full scope audit of
the interconnection costs of the French operator and its accounting segmentation.
? Critical review of the calculation of the Universal Service Obligation costs incurred by
? Critical review of the cost - forecasting model of France Telecom.
? Critical review of the implementation of Forward Looking Long Range Incremental
Costs at France Telecom
? Audit of France Telecom’s 2000 cost accounting system based on fully distributed
historical costs. Audit of the method applied by France Telecom in order to determine
its 2003 LRAIC cost base by reference to its 1999 fully distributed costs
? Audit of France Telecom’s 2001 cost accounting system based on fully distributed
historical costs. Audit of France Telecom’s 2004 LRAIC cost base determined by
reference to its 2000 fully distributed costs. Special focus was placed on the audit of the
partial leased lines interconnection tariffs.
In addition to the long-outstanding relationship with the French NRA, we have participated in
various assignments with other NRAs or telecommunication operators.
? KPMG Paris has participated in the review of Telecom Italia’ cost accounting system in
liaison with KPMG Roma. This assignment was conducted on behalf AGT, the Italian
? KPMG conducted, on behalf of the Office of the Director of Communications Regulator
(ODTR, the Irish NRA), the first ever audit of the fully distributed historical cost
system, the review of the cost of the Universal Service Obligations, and advising on the
implementation of LRAIC costs.
? KPMG Paris reviewed the chart of accounts of Guernsey Telecom’s cost accounting
system and following this, created a costing system for Guernsey Telecom using the
ABC methodology, in compliance with the European legislation.
? KPMG Paris led the first ever audit of Maroc Telecom’s cost accounting system for the
1999 financial year. This assignment was conducted on behalf of the ANRT, the
Moroccan NRA. This engagement was renewed for the audit of the 2002 financial year
and is currently ongoing. Maroc Telecom’s cost accounting system is based on fully
distributed historical costs.
? KPMG Paris has worked with the French Polynesian Telecommunications Regulatory
Authority in order to determine the cost of Universal Services incurred by the local
fixed line operator (OPT). In 2002, KPMG Paris worked with the OPT in order to
produce profit and loss statements per product and service.
? KPMG Paris is currently leading the first ever audit of Telkom SA Ltd Regulatory
Accounts following the liberalisation of the South African telecommunications market.
We have carefully reviewed the public consultation document, and paid particular attention to
section 7 of the “Annex to the Draft ERG Opinion on the proposed Review of the
Recommendation on cost accounting and accounting separation”. Our comments only refer to
the section on “reporting requirements and verification” as we think, based on our experience,
we may be in a position to provide some value added to the draft ERG opinion.
Scope and definition of audit
As far as the audit scope and verification is concerned (?7.2), we fully agree with the principle
of an audit of the compliance of the operators’ regulatory accounts with the rules and
regulations set out by the NRA. The audit work indeed consists in performing procedures on a
test basis in order to gain an appropriate level of assurance that the information is correct.
However, because the audit of regulatory accounts shall result in an attestation as to whether the
information provided by the operator is compliant with the regulations, the auditor’s opinion
cannot be delivered in the format of a standard audit opinion, as generally admitted under
International Standards of Auditing.
In our view, the audit work performed shall result in two different deliverables:
1) a specific audit opinion on the cost accounting model which results in the allocation of
costs on products and services. This type of audit procedures more relates to other attest
work categories and are not intended to give any opinion on the statutory financial
statement. The auditors shall issue an attestation on the compliance of the regulatory
accounts with laws and regulations. The auditors attestation shall include, among
? a reminder of the working hypothesis (unqualified opinion given on the statutory
financial statements by the statutory auditor,…);
? a brief description of the audit procedures performed (audit of the nature, accuracy
and completeness of financial data entered in the IT system supporting the cost
allocation calculation, relevance of the cost allocation methods, reconciliation
between cost model and regulatory accounts);
? the auditor’s opinion as to whether the regulatory accounts have been properly
prepared in accordance with regulations set out by the NRA.
2) a set of recommendations on the appropriateness of the cost accounting methodologies
applied and on the accuracy of financial data used (resulting both from the operator’s
accounting system and from external data). These recommendations, which could be
presented under a Management Letter format, are meant to be discussed with both the
operator and the NRA, and shall be followed up during subsequent years’ audits.
Mandate of the auditor
Concerning the mandate of the auditor,
- should paragraph ?7.2 iii) of the annex refer to the engagement letter signed between the
regulatory body and the audit firm, KPMG disagree with the principle of publishing the
number of man-days required to perform the audit, as it appears to be non-compliant with
International Practices (such as Sarbanes-Oxley Act or similar national laws). However,
there should be no issue at releasing the required audit fees as the international policies
already require this information to be disclosed in the documents made available to the
shareholders in the case of the statutory financial statements.
- should paragraph ?7.2 iii) of the annex refer to the NRA tender, it seems to us quite
difficult for the NRA to estimate the accurate number of man-days required to performed
the audit of the designated operator’s regulatory accounts.
The controlling entity
Finally, in respect to the choice of the controlling entity to be mandated for the audit of the
regulatory accounts, KPMG strongly believes that the audit work has to be performed by an
Annual control performed by NRAs
The draft ERG opinion suggested that “the NRAs may itself undertake the annual control,
provided it has the necessary qualified staff”. In KPMG’s opinion, this is not a question of
qualifications, but acting both as a regulator and as an auditor, the NRA would be judge and
jury. Indeed, the NRAs are aimed at releasing regulations and methodologies and have to make
sure, through verifications such as audit procedures, that the set regulations are properly
followed by the operators. But, in order to preserve independence, objectivity and dialogue with
the operators, it is important that the NRA mandate an external auditor.
Annual control performed by independent auditors vs statutory auditors
In addition to this, please consider the fact that the independent auditor should not be the same
audit firm as the statutory auditor. Why this? Because, due to the critical outcome of the
regulatory accounts for both the operator and the regulator, the former may put some pressure
on its auditor, for example in order to take accounting options that, though admitted, would have
a material impact on the regulatory accounts. Such pressures would then seriously challenge and
damage the necessary independence quality of the statutory auditor.