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If a Tree Falls in the Forest…

3 Jan

OversightThis past December the former COO/ CEO of global PR firm Weber Shandwick was sentenced to prison after pleading guilty to embezzling $16 million from the firm and ultimately its holding company, Interpublic Group, over a 9-year time frame. The fraud was perpetrated in part through the generation of “false and misleading invoices.”

This news should raise concerns for clients of the firm aside from the character of the individual. The lack of solid agency (and holding company) internal controls over a prolonged period raises an obvious question; “How do these lax controls impact our business and were any of these erroneous charges billed back to us?” Moreover, if it happened at one agency, could this be occurring elsewhere?

Given the nature of the marketing/ advertising industry’s use of estimated billing and the submission of invoices to clients, without accompanying third-party vendor invoices, it makes sense for marketers to conduct periodic contract compliance and financial management audits of their agency service providers to assess those providers financial stewardship practices, mitigate financial risks and allay potential concerns.

In the words of Norman MacDonald, author of Maxims and Moral Reflections: “Though we may not desire to detect fraud, we must not, on that account, endeavor to be insensible of it, for, as cunning is a crime, so is duplicity a fault…”

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Ad Industry: Lack of Transparency Limits Trust

5 Dec

dreamstime_s_38659968“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.” ~ Stephen Covey

The question often asked of senior marketers by their C-suite peers and in turn by marketers of their agency partners is: “Are we getting optimal value in return for our marketing investment?” A simple question, but one that is not easily answered given the breadth and intricacies of an advertisers marketing communications investment.

Let’s face it, with the pervasiveness of non-transparent fees and AVBs throughout the supply chain along with the number of intermediaries involved in service delivery (often without the advertiser’s knowledge) the strains on working ad dollars are many and can be profound. Combine this with the industry’s “estimated billing” methodology where few if any agencies ever provide third-party vendor invoices to support their billing to clients and it is easy to understand the difficulty advertisers have addressing the question of “did we get what we paid for?”

While the challenges to building trust between advertisers and the myriad of suppliers that touch their business are real, the means of addressing this issue is clear… the industry needs to commit itself to providing full transparency at every level.

Marketers will need to take the first step, reviewing all marketing services agency agreements to ensure that there is adequate language granting them audit rights, establishing record retention criteria and extending these guidelines to not just their agencies, but to third and fourth-party vendors. Further language regulating the appointment and monitoring of “interested parties” by their agency partners and limits to the use of principal-based buys must be incorporated into all agreements. Also, clear reporting and invoicing guidelines must be established with each agency partner to provide advertisers with a clear line of sight into the disposition of their marketing spend at each stage of the investment cycle.

Importantly, marketers will need to invoke their audit rights to conduct periodic reviews of agency compliance with these contract terms as well as each agency’s support of their billings to the client. This is a cost of entry for marketers if they’re truly interested in evaluating the efficacy of their marketing investment.

Consider but one aspect of advertising spend, digital media.

  • Digital media represents more than 50% of client ad spend.
  • Programmatic buying represents better than 90% of all digital display ad buying.
  • Publishers only receive 51% of advertiser programmatic ad spend.
  • Costs such as DSP fees, SSP fees and technology costs represent between 15% and 35% of advertisers spend in this area.
  • An “unknown delta” of one-third* of programmatic supply chain costs could not be identified.

*Source: Incorporated Society of British Advertisers (ISBA), Association of Online Publishers (AOP) and PwC “Programmatic Supply Chain Transparency Study.” 

While alarming, these statistics may represent a “best case” scenario when one considers the poor visibility that exists into the layers of intermediaries between advertisers and publishers, including but not limited to agencies, DSPs, SSPs, Ad Exchanges and data verification vendors… each charging a fee for their involvement. The Association of National Advertisers (ANA), which earlier this year commissioned a study on programmatic transparency, estimates that of the $200 billion plus in programmatic digital media spend “70% doesn’t reach the end consumer.” Where does it go? According to the ANA “it goes to fraudulent or non-viewable impressions, non-brand-safe placements and unknown allocations, as well as being spent on ad fees.”

Take SSP’s for example, they typically bundle fees with media costs once an auction is won and an impression purchased. Thus, advertiser visibility into SSP take rates, revenue share deals with publishers, margin realization rates and the number of hops is obscured.

We do not want to belabor the point, but similar examples of limited transparency exist across the entirety of the marketing communications supply chain.

In closing, we believe that the notion of trust is certainly attainable, but not until transparency reform becomes a reality for advertisers. Near-term, advertisers have another reason to push for transparency and audit the financial management practices of their agencies… stagnant and or reduced budget are putting pressure on marketers to do more, with less. The knowledge gained, historical dollars recovered and future savings realized from a formal accountability program can help to refuel marketing budgets.

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Advertisers: Did You Get What You Paid For?

2 May

Role QuestionPlans are approved, purchase orders are issued by the advertiser to their agencies who then invoice the advertiser on an estimated basis for the approved activity. Reconciling invoices are then submitted by the agency once jobs and campaigns are closed out are submitted. However, these invoices come sans any third-party vendor invoice detail.

So, how is it an advertiser can state with confidence that it received what it paid for?

The simple fact is that unless an advertiser conducts financial audits of its agency partners or it pays on a final billing basis (which is rare), they don’t know if value commensurate to its payments was received.

Think about that. Advertising spend is a material expense and there is little, or no billing support documentation provided by agencies to their clients to substantiate that expense. Given this approach it is fair to ask; “How comfortable should agency CFOs be that their organizations got what they paid for?” Typically, the only window into an advertiser’s approved expenses is agency invoice totals relative to approved purchase orders… not reconciled final billing support from agency affiliates and third-party vendors to the agency.

Along the way, marketing may receive agency reporting in the form of time-of-staff tracking and fee burn reports or job status summaries, but these are best used to generally track spend levels, not to verify purchases. The only way to vouch for the accuracy of an agency’s billing to a client is to conduct a financial management audit.

Unfortunately, the time lag between an agency’s initial billing to a client and final reconciled billing, where estimates are trued up to reflect actual costs can be several months – or sometimes not at all. That is a long time for an advertiser not to have a direct line of sight into the disposition of their funds.

This is the reason that Client/ Agency agreements contain guidelines governing agency financial reporting, time tracking, job and campaign reconciliation and acceptable billing practices (e.g., cost to be billed on a pass-through basis, net of any mark-up). As importantly, it is also why all such agreements contain record retention and audit rights clauses that provide advertisers with the ability to conduct contract compliance and financial management audits.

Based on experience, client-side CFOs should not place a blind level of trust in agency partner billings and financial reporting. Verifying actual costs and time-keeping relative to estimate, and independently vouching agency support is a sound practice – yielding solid learning that forms the basis of process improvements, enhance reporting, and improved controls. This in addition to financial true ups in the form of historical recoveries that more than cover the cost of the audits themselves.

As the saying goes: “In God we trust, all others we audit.”

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One Good Reason to Audit Your Advertising Spending

31 Oct

contract compliance auditingExperience from his early days in accounts payable brought home an important lesson…

I was recently talking with a friend, who retired as a senior financial executive for one of the large global airline companies. During our conversation he began to probe on AARM and our agency contract compliance and financial management audit service. While most finance professionals today came into the business long after electronic data processing (EDP) and payment systems came into vogue, this finance executive did not.

After we talked for a while about the nuances of agency compliance and financial auditing, he shared a remembrance from his starting position in the accounts payable department in the early ‘70s… prior to EDP. He recounted processing invoices from the company’s ad agency and the “stacks of paper” that accompanied their invoices. One of the nagging concerns that the finance team always had was whether the agency was reviewing the third-party vendor invoicing for both accuracy and to validate performance or simply passing along the documents. As a result, they implemented a policy that no invoice would be processed until the marketing team had reviewed and signed off on the billing detail. The goal was to encourage both the marketing team and the agency to examine the billing support for accuracy, rather than simply processing for payment. 

The estimated billing approach employed by most ad agencies used to be a paper-intensive process. Billing records not only had to be reviewed but stored and retained for at least 3 years. Thus, most advertisers waived the requirement for agencies to provide third-party vendor billing support with their bill-to-client invoices. Even with the advent of EDP and the digitization of records, advertisers were content to require their agency partners to retain the billing support and to make those records available for review if an advertiser chose to audit those documents. Today, if an agency invoice has been reviewed by a marketing representative and the dollar amount falls within the approved purchase order amount/balance the agency invoices are processed for payment.

Despite the size and material nature of marketing and advertising budgets, most organizations do not invoke their contractual audit rights to validate their agency billing support.

This reality evoked an interesting observation from my friend: “Processing payment, without a review of the supporting third-party vendor documentation is one thing, but to forgo periodically auditing those records is a classic example of blind faith.” His words, in turn, reminded me of a quote from rock legend Bruce Springsteen: “Blind faith in your leaders, or in anything, will get you killed.”

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It’s Time to Address the Biggest Risk to Your Ad Budget

26 Oct

iceberg risk

As year-end draws near, many organizations are hard at work on 2022 planning. 

Significant effort will be invested in preparing next year’s internal audit plans, financial plans, operational plans, and marketing plans / budgets. The question is “Will any of these initiatives address the biggest risk to an organization’s advertising spend?”

When annual planning commences, representatives from internal audit, finance, procurement, and marketing are all proactively evaluating different mechanisms for driving performance and profitability, while mitigating risks to the organization.

Yet we know from experience that one of the best tools for doing just that, on behalf of a significant P&L line item, is likely not being considered.

Which P&L line item are we referring to? Advertising Expense. And the tool that simply is highly effective at mitigating risks and returning significant financial value is advertising/ media agency financial contract compliance audits.

The “Right to Audit” clause is a cornerstone control & financial protection in all client/ agency agreements. Further, organizations such as the Association of National Advertisers, World Federation of Advertisers and the ISBA strongly recommend that advertisers routinely perform compliance reviews to maintain transparency and safeguard their marketing investment. 

When a company’s control environment does not include detailed testing of advertising agency billings and costs – there are real risks that come into play for a few reasons. For one, client marketing teams are forward looking, focused on building brands and driving demand. Testing past financial activity is not necessarily on their radar. Secondly, agency finance teams are hyper-focused on their own profitability. And finally, the estimated billing process employed by ad agencies, takes client money upfront based upon projected expenses. In turn, these expenses are to be reconciled to actual costs once a job is closed. The long lag times for when this final accounting takes place and the lack of detailed billing support that is typically shared with the client creates risks for the advertiser.

The good news is that advertisers can proactively address these concerns and establish a compliance testing audit program that is cost effective, respectful of the agency’s time, and yields material near and long-term benefits, including: 

  • Identification of past overbillings and financial non-compliance for remedy.
  • New contract language including industry best practice & agency reporting guidelines.
  • Financial efficiencies and cost savings tied to process improvements.  
  • Comfort in knowing that the organization has a full understanding and strong controls in place to manage one of its largest expenses.

Most importantly, the work helps to build an organization’s level of trust in each of its agency partners and an appreciation for the role that the agency plays.

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We Know We Should Audit, But…

30 Mar
Hesitation

We’ve all seen the look on the face of an anxious toddler as they prepare to jump into the waiting arms of a parent in a pool.

The child wants to leap, knows there is little risk, trusts their parent and knows that the feeling of satisfaction related to their action will far outweigh their apprehension, yet they hesitate to take the plunge. This scenario can be analogous to organization’s considering an independent contract compliance audit of an advertising agency partner.

Managers’ go through a series of considerations when weighing whether or not to conduct an agency compliance and financial management review, including:

  • It’s not that we don’t trust our ad agency partners
  • It’s not that we don’t believe our agencies are putting forth their “best efforts” to safeguard our marketing investment
  • It’s not that we don’t have confidence that our marketing team is effectively safeguarding our marketing budget

But…

  • We have never audited this aspect of our SG&A
  • Marketing spend is a material expense
  • Our C-suite executives are asking questions regarding risks and controls
  • Over time, our agency roster has grown and spending has increased
  • We read the trade press and are concerned about fraud, brand safety, adherence to fiduciary standards and the like

In the end, Finance, Procurement and or Internal Audit leadership know they should undertake this important risk reducing work. They also realize that an outside specialists provides valuable industry expertise. Yet, they often cannot get to “yes.” 

Why the hesitation? The reasons are many; Marketing indicates that the timing is not right, we don’t have the budget, we’ve conducted internal reviews ourselves, our agency is a trusted partner, we’re considering transitioning agencies… and the list goes on.

The good news is that all rationale cited for not moving forward with comprehensive testing of  ad agency partner billings, costs and contract compliance can be readily addressed. The audit process is not time consuming, poses no relationship risk, is allowed for in the client-agency agreement, and most importantly the benefits far outweigh the cost / risk of the audit not proceeding.

Audit results yield a combination of historical financial recoveries tied to billing errors, unauthorized mark-up, unreconciled jobs, and outstanding credits.  Financial true-ups and learning far outpace the initial audit investment. And most importantly, the work yields forward looking process improvement, contract language improvement, financial refinement, and risk mitigation opportunities to generate cost savings and peace of mind.

With proper oversight, we have seen concerns regarding agency accountability replaced with a sense of trust and confidence. Key benefits in a market sector noted for its lack of transparency, murky supply-chains and lack of trust.

Where does your organization stand on this important accountability practice? Perhaps the words of Daniel Wagner, a widely published author on current affairs and risk management, can embolden organizations to take the prudent action:

“Some risks that are thought to be unknown, are not unknown. With some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed with the right set of tools, procedures, knowledge and insight, light can be shed on variables that lead to risk, allowing us to manage them.” 

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Agency Audits: An Advertiser “Right” Not Yet a Standard Practice

26 Jan

dreamstime_xs_7828625For most organizations, the “Right-to-Audit” is a staple in their advertising agency agreements. Worded properly, this important contract language provides the company an opportunity to periodically check ad agency compliance with contract terms, review financial support that should agree to agency billings and to otherwise evaluate various performance metrics.

Yet despite the inclusion of this vital risk management clause and the rights that it confers, far too few organizations actually follow through to perform the testing which would otherwise provide stakeholders with comfort that agency billings are accurate and true.

So, why don’t advertisers audit their agency partners?

One might logically deduce that all clients would periodically review agency compliance, financial management and performance given:

  • The materiality of spend levels.
  • Limited insight to whether agencies are accurately reconciling estimated invoices to actual costs.
  • The complex, multi-layered supply chains, especially in digital media.
  • The well-publicized news of the ad industry’s ongoing challenges with transparency and fraud.

Aside from mitigating financial risk that could be eroding marketing expense effectiveness, another benefit of agency compliance testing is that it can help allay client-side stakeholder (marketing, finance, internal audit, procurement) concern and further build trust. Trust is crucial, particularly clients are relying on agency partners to fulfill their fiduciary and legal responsibilities in stewarding their advertising funds.

In addition, the level of trust between advertisers and their agency partners has been under siege. Consider ID Comms 2018 Global Media Transparency Survey where only one in ten respondents indicated that their “relationship with their agency or advertising client was trusting.” Further, 40% of respondents believed that trust levels were “average” compared to 52% in ID Comms 2016 survey.

We see first-hand where contract compliance and financial management audits identify and address gaps in understanding, controls and reporting that negatively affect client spend effectiveness and erode agency margins. Whether financial definitions, billing basis, fee calculations, project briefing, the approval process, rework levels, custom reporting requests, and or payment timing issues, audits can provide a prescriptive for positive change to benefit all stakeholders.

In our practice we see three principal reasons why the right-to-audit is not employed often enough – and therefore has become much less effective as a control than necessary:

  1. No clear ownership who is responsible for the Audit function in the context of marketing.
  2. Lack of a formal budget allocation process for assurance and risk mitigation for marketing and advertising spend.
  3. Limited organizational understanding of risks related to the advertising category.

As a result, clients continue to invest billions of dollars annually through their agency partners in spite of never verifying whether there are proper controls and regulations to safeguard those funds and optimize the efficacy of their investment. The need is real. Building effective verification and monitoring tools into client-agency relationships cannot be viewed as an option, but rather a prerequisite.

Fortunately, if the will is there on the part of client organizations, the solution is relatively straight-forward.

  • Responsibility for the checking agency financial compliance cannot rest solely with the marketing team. Finance, internal audit and procurement each have a role to play in the process.
  • Setting up a rotational audit program for each of the organization’s audit partners is paramount. Funding the effort through marketing, finance or internal audit budgets can ensure that the program will be executed as designed.
  • Establishing direct relationships between client-side finance and agency finance personnel greatly enhances an advertiser’s line-of-sight into the disposition of their funds at each phase of the advertising investment cycle.
  • Develop a relationship with a co-source supplier with deep marketing audit expertise.

Enhancing an advertisers control framework to include the regular review of their agency partners’ client accounting practices and controls along with their contract compliance to contract terms will inevitably mitigate risks and lead to better management of this important investment. In the words of Simon Mainwaring, brand futurist and businessman:

“The keys to brand success are self-definition, transparency, authenticity and accountability.”

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One Thing Marketers Can Do to Mitigate Advertising Risk

26 Nov

Chances are, in 2020 your advertising budgets were slashed in response to your organization’s fiscal response to COVID-19.

Further, if you’re like most, those budgets aren’t likely to bounce back in the near-term. According to WARC Data’s latest study on global advertising trends, even if the ad market rises by the expected 6.7% in 2021, it will only “recoup 59% of 2020 losses.”

Downward pressure on ad budgets certainly is creating a need for organizations to optimize marketing resource allocation decisions. Yet, given the nature of the ad industry and its complex, layered, often non-transparent supply chain, advertisers may not have ready access to information needed to support these efforts.

As a corollary, in our contract compliance and assurance practice, we have found that those advertisers who do receive timely, detailed, and accurate financial reporting from advertising agency partners benefit greatly – however, most client/agency financial reporting relationships often do not meet this standard.

What is the “one thing” that marketers can do to improve the effectiveness of their advertising investment and to simultaneously mitigate risk? Implement a structured and consistent agency financial reporting (AFR) and monitoring program.

The AFR program’s core element is a finance (client) to finance (agency) relationship and a set of standardized templates to be completed quarterly by each agency partner. AFR submissions include both detailed and summary quarterly and year-to-date activities, and includes at a minimum:

  • Aged work-in-process summary
  • Billings by job and summary, including associated client purchase order, SOW or MSA
  • Out-of-pocket expense & travel by job and summary
  • Budget status by job (approved, spent, balance remaining, job close date)
  • Actual agency hours incurred vs. planned (tied to each staffing plan) for each retainer and out-of-scope fee jobs, including the reasoning for variances
  • Agency fee projection (trend vs. plan)
  • Unbilled media summary

Reporting templates and submission deadlines should be standardized across agencies, managed by client finance (non-Marketing) personnel, and shared cross-functionally within the client organization. AFR details can also serve as inputs to formal, broad-based “Quarterly Business Review” meetings that should routinely take place between client and agency.

The client finance team should take the lead in administering the AFR process, review agency submissions, and have a direct line of communication and relationship with agency finance personnel.

When assisting in implementing these programs, our experience has shown that once an AFR program is pushed out to an agency network and client stakeholders have been through the cycle for two or three quarters (receive agency reporting, review for completeness and reasonableness, perform variance analysis and engage agency finance personnel in Q&A) then ongoing maintenance of the program becomes more routine, engrained, and time commitments decline.

More importantly, advertising ARF monitoring and oversight will mitigate risk, will boost agency reporting accuracy, and will increase shared confidence between client and agency when it comes to financial management and future resource allocation decisions.

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Marketers That Don’t Have Formal Assurance Programs Are At Risk

27 Sep iceberg risk

For most companies, marketing spend can be considered a material expense, often running at 5% or more of annual revenue. Yet, a majority of these organizations have not included marketing in their corporate governance and risk mitigation efforts, conducting limited or no supplier compliance, financial management and performance testing.

Given the complex nature of the marketing and advertising space, the less than ideal levels of transparency and the murkiness of advertiser supply chains, this creates a precarious situation.

It must be noted that this is an industry which is largely predicated on the concept of “estimated billing,” where advertisers are invoiced in advance for approved activity by their agency partners. These funds are then disbursed over time by the agency to third-party vendors or realized as agency revenue in accordance with remuneration agreement terms. An underlying tenet of this billing model is  that estimated costs are “trued up” to reflect actual costs incurred once a job is closed, supplier invoices tallied, and an agency’s time-of-staff investment is fully posted. However, reconciliation efforts do not always occur and approved but unused funds, for which advertisers have been billed, are not always returned in a timely manner or at all.

Many Client/ Agency contracts contain solid control language to protect the advertiser and to provide explicit financial management and reporting guidelines to their agency partners. That said, many agreements are outdated and do not contain the requisite terms and conditions necessary to adequately safeguard an advertiser’s marketing spend. Ironically, good contract or not, too few organizations review supplier compliance with agreement terms or conduct financial and performance reviews of their agency partners… even though most agreements provide advertisers with the right to audit the agency to review the financial documentation that supports the agency’s billings.

In our experience, advertising agencies expect their clients to conduct periodic compliance and performance testing. The fact that more companies are not following through on their audit rights is a mystery. Why should testing be performed? Because periodic compliance reviews drive accountability and improve transparency, addressing questions such as:

  • Did we get what we paid for?
  • Were we charged the appropriate rates for the work performed?
  • Were third-party expenses billed on a pass-through basis, net of any mark-up?
  • Did the agency reconcile fees to reflect its actual time-of-staff investment?
  • Were third-party vendors paid in a fair and timely manner?
  • Were agency and third-party vendor billings accurate?
  • Are future projects being estimated and approved using accurate historical information?

Beyond providing financial management assurance and recoveries, compliance testing identifies gaps in control, yields recommendations for improving contract language and reporting and can drive process enhancements that result in future savings.

In the end, sound Client/ Agency agreements backed by a formal risk mitigation program can protect a company’s marketing investment, converting risk control measures into business growth opportunities. This, while driving accountability and providing company stakeholders with a sense of trust and confidence that its marketing team, agency partners and third-party suppliers are properly stewarding the funds entrusted to them.

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Compliance Programs Can Transform Marketing

24 Jun

compliance-rulesCompliance is a cost of doing business, and companies invest appropriately in compliance and risk management programs and policies. Many have even been successful at elevating compliance to “cultural ethic” status.

That said, few organizations have risk-management frameworks in place for their marketing and advertising spend. Why?

Consider that the marketing and advertising expenses are material to the financial statements. Further, marketing represents a critical link to building brands and driving revenue. If not managed properly, dollars invested are lost to fraud and non-transparent advertising supply-chain practices, lowering working dollars and leading to declines in marketing efficiency. These factors help to underscore the necessity for compliance risk mitigation coverage in this area.

Allaying risks aside, we have been fortunate enough to witness the transformative power of compliance audit work and financial management oversight programs for advertisers. Benefits have included financial recoveries, cost reductions, improved efficiencies and enhanced revenue generation.

Best of all, technology advancements combined with sound compliance frameworks and proven audit work processes afford organizations the opportunity to efficiently conduct comprehensive, periodic reviews of their marketing services agency network. In our experience this is readily achieved without disruption to client-agency workflows or performance.

Aside from the financial benefits, a structured marketing and advertising compliance program can instill a sense of confidence among all stakeholders that advertising related risks are being monitored and continuously mitigated. Additionally, concerns, questions and the unknown regarding a marketer’s ad agency network, are replaced with a sense of trust and confidence. This is a compelling outcome given the important role that an advertiser’s agency partners play.

In the wake of the COVID-19 crisis, marketers will face a myriad of challenges in meeting their organization’s performance expectations. The combination of an uncertain future regarding the consumers’ return to “normal” consumption patterns and behaviors and budget reductions will require a disciplined approach to planning and resource allocation efforts… not to mention the need for flawless execution.

Embracing compliance and extending enterprise initiatives in this area to include marketing and advertising will mitigate risks and boost the return on marketing investment. In the words of former U.S. Navy Seal and NY Times bestselling author, Brandon Webb:

“Being a Navy SEAL and sniper taught me all about risk management. Take away all the risk variables under your control and reduce it to an acceptable level. The same fundamentals apply in business.”

 

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