New regulations create a host of new challenges for communications companies. kpmg.com

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1 New regulations create a host of new challenges for communications companies kpmg.com

2 1 New regulations create a host of new challenges for communications companies New regulations create a host of new challenges for communications companies Perhaps no industry sits closer to the nexus of the information economy than the telecommunications sector. That centrality has made the government more active in improving access, safeguarding the rights of participants, and fostering a competitive playing field.

3 New regulations create a host of new challenges for communications companies 2 A more active regulatory and compliance climate Several recently enacted federal programs and an expanding menu of legislation make it incumbent upon communications companies to stay abreast of changing compliance requirements. More stringent accountability standards mean that providers and operators across all tiers will be expected to step up their control, monitoring, reporting and compliance capabilities. The following section summarizes key changes and their potential implications. Expanding broadband s reach The Broadband Stimulus Act and The National Broadband Plan Recognizing that access to communications is a prerequisite for economic growth, the Broadband Stimulus Act of 2009 and the National Broadband Plan, published in 2010, seek to expand broadband coverage across the country. In addition to increasing affordable Web access, other provisions look to widen the use of Web-enabled technologies to grow new sectors, such as the buildout of an Internet-based smart energy grid, and increase transparency in healthcare by mandating the transition to electronic medical records. Implications: To comply with program rules, communications companies must satisfy a number of compliance, monitoring and reporting requirements that, in many cases, will mean upgrading and refining systems, processes and internal controls. While the short- and long-term implications of The National Broadband Plan are evolving, certain impacts will require organizations to: Map compliance requirements against current accounting, compliance and documentation retention processes Assess the effectiveness of the internal control environment and identify where improvements need to be made Establish processes to monitor third-party relationships and related compliance requirements Establish processes for appropriate cost segregation, compliance with Federal Acquisition Requirements and ancillary American Recovery and Reinvestment Act referenced legislation such as the Buy America and Davis Bacon Acts Ensure timely reporting to all relevant federal agencies and recovery.gov. Funding the funding Universal Service Funds (USFs), Connect America Fund (CAF), Intercarrier Compensation Reform, and Mobility Fund (MF): The Federal Communications Commission (FCC) has a number of open proceedings that are expected to alter the nature and purpose of legacy USFs, shifting the focus of universal service funding from support of traditional voice services to new funds that support broadband deployment. These changes will likely alter the intercarrier compensation system, the nature and amount of USF funds collected, and the way in which telecommunications organizations account for, report and potentially recover such contributions from customers. In addition, the proposals may impact future distributions of such USF funds as well as the underlying qualifications and filing requirements by future recipients. Implications: In anticipation of these changes, carriers should consider simplifying or rationalizing their organizational structures in order to reduce the complexity and redundancy associated with affiliate transactions and multiple filing requirements within their organizations. Organizations may also want to accelerate efforts to streamline and consolidate their revenue/billing and regulatory reporting systems. Beyond this, carriers may also need to: Standardize accounting and reporting processes Review how contract terms and provisions are monitored and enforced Establish periodic reconciliation of remittances to receipts Automate systems and processes to track and monitor reseller status and certification Develop or enhance pricing, revenue assurance and cost optimization strategies in order to effectively embrace the anticipated changes

4 3 New regulations create a host of new challenges for communications companies Protecting fair use and access Privacy standards With digitization increasing the amount of personal and financial data traveling over communications networks, the issue of data protection and privacy risk has risen to the fore. Those concerns have become increasingly important to consumers, who often have limited knowledge about how their personal data is being collected and used. In addition, the growing use of location-based services and social media has added to calls to provide better definition, clarity and rules around the use of personal data. Implications: Most in the industry anticipate stricter privacy regulations, especially with more consumers and members of Congress calling for Do Not Track provisions similar to those used in Do Not Call lists. Although many industry players are taking proactive measures to improve transparency, many also acknowledge that more needs to be done to improve privacy provisions and advertising disclosures across their partner network. Regardless of whether formal regulation is enacted, public pressure and enlightened self-interest will likely require companies to: Update systems, databases, contracts and metrics to manage and protect consumer data Simplify and clarify privacy policies to make them more intuitive and accessible to users Review and update contracts with third-party vendors to ensure that privacy standards are upheld across the supply chain Net neutrality The idea of net neutrality argues that companies providing Internet service cannot give preferential treatment to one data source over another. The subject has long been a source of contention between content and network providers. The debate centers over whether companies can create a two-tier Internet, giving better and faster transmission to those willing to pay a premium and the ability to censor or impede content that they do not like. Implications: On Dec. 21, 2010, the FCC approved a compromise that would create two broad classes of Internet access, one for wireline providers and one for wireless providers. While there will likely be slightly different applications for wireline and wireless providers, the three overarching principles prescribed by the FCC of transparency, no blocking, and no unreasonable discrimination will apply across industry. Those rules will go through a series of court battles before being resolved. In the meantime, broadband service providers face a number of pressing challenges. Among them are: Balancing network capacity against growing consumer appetite for video and data Protecting fair use while at the same time preventing branded content from being cannibalized by competitors Developing network contingencies to forestall service degradation and outages during peak periods.

5 New regulations create a host of new challenges for communications companies 4 Increasing transparency for the consumer Truth-in-billing and cramming The FCC has proposed new rules that require mobile service providers to provide greater transparency in their billing practices. The provisions would require operators to provide usage alerts that let consumers know when they are reaching monthly data or voice caps. Similar proposals target cramming, the practice of placing unauthorized or potentially misleading charges on customer telephone bills. That issue has taken on greater political momentum in recent months with a recent FCC report finding that as many as 15 to 20 million Americans have unauthorized charges placed on their landline telephone bills annually. 1 Implications: The proposed rules will require mobile service providers to notify customers when they approach monthly limits that result in overage charges. To thwart cramming, the provisions mandate that telephone companies use clear, non-misleading, plain language to describe billed services and distinguish charges that will result in disconnection if unpaid from those that will not. Telephone companies must also provide toll-free numbers that consumers can call to 1 query or dispute any charges. In advance of these proposed changes, carriers may want to take the lead in: Crafting more consumer friendly and transparent billing statements Conducting an impact assessment to gauge the extent and cost of changes needed to bring billing systems into compliance Reviewing third-party contracts and reseller relationships to determine where additional disclosures and end-user authorization will be needed. KPMG LLP has the experience and resources to help. KPMG works closely with many wireline and wireless carriers in addressing regulatory compliance issues. We have served as the leading regulatory compliance firm in assessing compliance with USF rules and regulations for both the High Cost (carrier) and Schools & Libraries (e-rate) funds on behalf of the Universal Service Administrative Company (USAC). That experience gives us a rich knowledge base to help clients minimize their learning curve with respect to rules, requirements, and expectations.

6 5 New regulations create a host of new challenges for communications companies Case study: Helping one provider recover lost USF dollars A large Tier 1 operator brought KPMG in to help after the company s annual USF filing put them on the hook to contribute more revenues into the Fund than they had received from their customers. Although the gap was only a few percentage points, it added up to millions in potentially unrecovered cash. Like many carriers of its size, business complexity and a proliferation of products, transactions and partnerships, made it hard for systems and processes to keep pace. On the reseller side, for instance, there were frequent discrepancies in the number of accounts the provider believed were being managed by the reseller and those that were certified at the end of the year. This left the provider stuck footing the contribution bill at year-end. Accelerating growth in new areas, such as VoIP, posed other challenges. In many cases, legacy billing and accounting systems made it difficult to isolate USF-exempt services, such as Customer Premise Equipment (CPE) and installation charges. That meant the carrier s contribution factor was often levied on the whole bundle, resulting in higher than necessary payments. In addition, because many existing processes were not designed to tag which revenue streams in which products were eligible for USF recovery, the company relied heavily on manual adjustments. This was both costly and time consuming. For instance, teasing out the right revenue allocations on large national accounts, where credits, discounts and volume-based pricing were the norm, required a small pool of full-time staff. To help the carrier sort through these issues, KPMG identified a set of immediate and longer-term actions the company could take to better account for and recover USF revenue. Detailed analyses by KPMG laid out a series of quick fixes, aimed at correcting misclassified charges across the provider s product portfolio and addressing back-end adjustment errors. Those improvements netted significant savings in a six-month period. Looking ahead, KPMG has recommended a number of longer-term process improvements to standardize the way data is collected across billing, general ledger and form completion, steps that are expected to dramatically improve revenue reconciliation. Case study: Coping with the broadband stimulus compliance burden KPMG was engaged to assist a Tier 3 carrier prepare for the compliance requirements that accompanied a recent Broadband Stimulus Award. The organization recognized that accepting the award would require ramping up many of their traditional financial and organizational processes. As a first step, the KPMG team walked management through the various requirements created by the Notice of Funds Availability and the American Recovery and Reinvestment Act. With that understanding, management had a better grasp of what the future state control environment should look like. To get a handle on the current state, KPMG assessed the company s compliance processes, a review that encompassed internal controls, accounting systems, and human resource processes. In addition to the gap analysis, management also received a heat map that summarized key risks. That allowed company leadership to understand where to fine tune their internal controls and backfill missing processes, such as those required to comply with the Buy America Act, the Davis Bacon Act, and the collection and retention of supporting information. With the initial compliance review complete, KPMG worked closely with functional teams, to clarify roles, responsibilities and reporting relationships, an effort that culminated in the creation of a formal Project Management Office to help monitor and track reporting deadlines, audit reviews and the overall project buildout. Although the transformation is still ongoing, the company is already seeing results in the form of more streamlined financial and compliance processes, improved segregation of duties, and better cost management.

7 Let us help. KPMG can assist you in managing the growing array of regulatory and compliance activities. We help clients: Comply with applicable FCC rules and regulations Record and report revenue for regulatory purposes, including the proper identification and allocation of revenue to appropriate revenue categories and jurisdictions Improve the regulatory process to help drive revenue enhancement and cost optimization while maintaining regulatory compliance Optimize legal entity structure for operational and financial efficiencies Automate regulatory processes with appropriate controls, enabling continuous monitoring of regulatory compliance and timely reporting Prepare for compliance audits from regulatory agencies and third-parties with minimal interruption to normal operations. Assess regulatory risk and related impact on governance structures, policies, processes, procedures, and systems.

8 For more information, please contact: Carl R. Geppert Partner and Communications Industry Regulatory Compliance Leader T: E: kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.