That enterprising young chap Paul Barry has written an excellent guide to how anyone can make $6.9 million. The guide is called Rich Kids and is Paul's story of the One.Tel disaster. But it also provides an invaluable insight into the history and functioning of One.Tel at the time Jodee Rich and Brad Keeling received their famous $6.9 million performance bonuses. Pierpont will summarise it as a step-by-step guide:
* Go talk to Optus, which must be the softest touch in Australia.
In 1995, Jodee negotiated a deal under which Optus agreed to pay One.Tel big subsidies to pump out handsets to customers. Optus also guaranteed to sell calls at a rate that would give One.Tel a fat margin, to pay One.Tel $170 for every connection and to pay a $120 loyalty bonus for every customer One.Tel signed up (which was $120 more than
anyone else in the industry was getting).
This deal ensured that sales went crazy. Every new mobile number registered brought One.Tel an immediate cash payment of $120 straight into the bank. One.Tel didn't even need to sell handsets or sign people onto long-term contracts to get these Optus payments. Giving out SIM cards, which counted as new mobile numbers, was enough.
So One.Tel flogged SIM cards to everyone. According to one founding worker at One.Tel, ``it was a chronic customer base, full of single mothers, pensioners and schoolkids''. Dealers would go to Bondi beach or Cabramatta, stand on a corner and pay people $10 to sign up. No access fee, no minimum call spend and no fixed term for the contracts. Paul says that back at One.Tel head office ``they would stick SIM cards onto photocopied sheets, write down the phone numbers and PIN codes, and send them off. The SIM cards were activated as soon as they left the building, although there was no guarantee they would fall into the right hands. As soon as this was done One.Tel would collect its Optus bonus''.
Optus could claw the money back if the number did not remain active for at least 12 months and at least half the SIM cards were never used at all but meanwhile the cash rolled in. Clawbacks were tomorrow's problems, as were bad debts, which were already running at extraordinary levels.
* Run a chaotic office.
The company started with a flat management structure because it had only 10 employees and the structure was still flat when it had 3,000. Paul says: ``Finding the person responsible for doing a particular job was a nightmare. The telephone list didn't tell you who did what, and no-one had offices, so new managers found themselves wandering down rows of pods, asking for people by name. The lack of job titles made it easy for people to claim it was not their job to do what was needed.''
In 1997, One.Tel launched its new overseas phone service, with a clever TV commercial telling customers to dial 1478 for access. However, the 1478 number was not yet online, which meant One.Tel's call centre was deluged with angry calls.
The back office and billing system didn't work, which meant (a) bad debts piled up, and (b) sometimes good customers were disconnected in mistake for bad customers. Irate customers who rang the call centre could wait for more than an hour to speak to a live human being. By mid- 2000, the call centre was failing to answer more than 70 per cent of
callers at all.
If anything, the call-centre staff had a rougher time than the customers. By late 2000, staff turnover in the call centre was running at 300 per cent a year. New recruits were hired in batches and trained for three weeks to master One.Tel's systems, products and plans, but sometimes the number of complaints was so high they were snatched from the classroom in a few days and thrown into the fray.
* Don't conduct credit checks on customers.
One ex-employee said: ``The collections area was the symbolic garbage dump of One.Tel ... all the awful decisions in sales, marketing and credit control ended up in the filthy cesspit of collections.

It was the collection team's role to chase the fringe-dwellers, low-lifes, panhandlers, geriatric gypsies, crooks, beggars, hobos, scam artists, habitual pot smokers, drug addicts, ex-cons, failed businessmen, bankrupts, caravan-park visitors and any other person whom One.Tel had successfully cornered into this very low-end niche market.'' Customers who had been signed up included Astro Boy, Fred Flintstone, Homer Simpson and Yogi Bear (who had given his address as care of Yellowstone National Park).
* Have a two-man remuneration committee comprising John Greaves (chairman of One.Tel) and Rodney Adler.
While all this chaos (and a good deal more) was ensuing, John and Rodney handed out the bonuses to Jodee and Brad. The bonuses were related to the market capitalisation of One.Tel. The market capitalisation must have been at least partly driven by its numbers both of customers and finances. The customer number was inflated by Yogi Bear and his kin, and Paul gives the impression that the finances must have been a mite inflated, too. Maybe we'll know more if we ever see the blue file.
What's the blue file? Aha.
The men at the top of One.Tel relied on two reports to keep them posted on how they were faring financially. The first was the monthly ``flash report'' intended to be a very rough assessment of sales and profit which came out two or three days after the end of each month. The second was the management accounts, compiled a couple of weeks later.
By the second half of 2000, bills were going out six to eight weeks late and were wrong, anyway so the management accounts were delayed for a couple of months. That left the management and board with only the flash reports as a guide.
According to Paul, in the last quarter of 2000, there were running battles between the group financial controller, David Barnes, and his immediate boss, Steve Hodgson. ``Every month Barnes presented his careful and cautious estimates of how much profit the business was making and Hodgson revised them upwards to show that One.Tel was on budget and
going well,'' says Paul. ``There was no evidence to support this, and plenty of indications to the contrary, but Jodee, Brad and [finance director] Mark Silbermann desperately wanted to believe that everything was fine because they had staked their future on hitting the forecasts for 2000-01.''
Barnes quit in early 2001. Paul says it was because he felt he could not afford to be the financial controller of a company that was producing misleading data. To be fair, Jodee denies that was the reason Barnes quit and said Barnes left because he was working too hard and wanted to be in a smaller company. (But then, Jodee denies an awful lot of other things, Paul says.)
Paul says that before leaving, Barnes handed a blue file to one of his colleagues. It was several inches thick, full of computer printouts and other documents with Barnes' handwritten notes on them. He had been keeping a meticulous record of the changes he had been asked to make to flash reports and forecasts, and who had asked him to make them. The colleague locked it away in a drawer, having been told by Barnes to keep it safe.
After One.Tel collapsed, the troops from ASIC raided the homes of the principals, searching for documents. As the raids were occurring, a bunch of senior people from One.Tel gathered for drinks in the Dendy Bar in Martin Place.
Paul says: ``They soon started talking about how they had been asked to change figures. Then they got onto the subject of David Barnes and the
blue file, which was locked away in the top drawer of a desk on the 28th floor. One of the assembled company slipped away to the toilet for a minute and rang an ASIC investigator who was at the moment raiding Silbermann's house to make sure he knew where the file could be found.''
So did ASIC find the blue file? Well, this is unofficial and strictly confidential you understand, but Pierpont believes they did. Pierpont imagines the blue file would contain interesting reading for One.Tel nonexecutive directors. The name of James Packer comes to mind, for instance.

“Sales and other Revenue as well as related accounts receivables and cash receipts are especially susceptible to manipulation and theft. This results in fraudulent financial reporting.”
You are to provide a report that deals with the following issues related to the One Tel case study:
1. the auditor’s responsibility in relation to fraud and what the auditor must do in response to the issues identified at One Tel in relation to sales, accounts receivables and cash receipts;
2. the process that One Tel used for selling its telecommunication products as well as the internal controls over sales, cash receipts and accounts receivables that were in place at One Tel;
3. any weaknesses that you identified in the internal controls used by One Tel over sales, cash receipts and accounts receivables;
4. the factors, along with specific examples, that should be recognized by the auditor in this case as having an effect on the risk of fraud;
5. the impact of corporate governance of One Tel on the issues you identified and the importance of the control environment or “setting the tone from the top”, in establishing a culture of honesty and integrity in One Tel.

Answer rating: 100% (QA)

1 The auditors responsibility in relation to fraud is to exercise professional skepticism and to obtain sufficient appropriate audit evidence to allow ... View the full answer