Tag Archives: right to audit

Agency Agreements Require Adequate Audit Rights

14 Apr

Advertising Audit is an important financial control process – not an optional luxury.

Any large company conducting business with an advertising agency or media buying firm without comprehensive Audit Rights is simply at risk. The marketing supplier may refuse to cooperate with (or significantly restrict) even very reasonable audit requests.

Based on years of experience and observation, it is clear that a sub par or non-existent audit clause often limits an Advertiser’s ability to implement standard compliance testing which therefore limits their opportunity to validate agency billings and gain comfort. Important learning opportunities are also lost – clearly an undesired outcome.

An example of a healthy financial relationship between parties – there are cases to note where even lacking clear audit documentation, the marketing supplier has complied with audit requests, but these cases are few and far between.

Pushback is a “red-flag.” Good financial practices should have nothing to fear from thorough scrutiny. The more pushback the higher the risk meter should rise.

Verification of billing accuracy / support would seem an innate right of any large company spending millions of dollars with a vendor (yes, even in Marketing).

What should you do? (1) in the near term amend the current Client-Agency Agreement to add a Right to Audit clause – and make it retroactive for at least 3 years; (2) add a Right to Audit clause within an ancillary document such as a Statement of Work (SOW) or an annual amendment to the Master Client-Agency Agreement; or (3) create a new document signed by both parties creating a Right to Audit and adding it to the vendor master file.

Ensure the audit clause is
well-defined and comprehensive.
For a guide, contact AARM at info@aarmusa.com

Once Audit Rights are established, a best practice and preventative control measure is to implement periodic and routine testing to deter wasteful practices, to identify errant billing transactions and to monitor key financial metrics. Testing should be performed at least annually, and always in cases where an agency relationship has been terminated (“transition audit”).

The audit concept also applies to systematic (or continuous) monitoring processes. A systematic monitoring program measures agency financial transactions, reporting and timing against a predetermined set of tolerances. Metrics are compiled and delivered at least monthly to stakeholders. Systematic monitoring is generally performed by an independent third-party with specialized software, and the Advertiser often chooses to share results with the agency – to support incentive compensation goals of and or a basis for behavior modification.

Right to Audit is a necessary safeguard in today’s business environment. Determining a schedule, methodology, and defined approach that encompass at some level each vendor in the organization’s marketing network will provide necessary assurance to management that adequate oversight and preventative controls are in place to catch errors, drive efficiencies and enhance ROI.


An Advertisers Right to Audit

11 Feb

Virtually all client-agency agreements contain a “Right to Audit” clause, yet few advertisers are committed to conducting contract compliance or performance audits. Which raises an interesting question; “Why negotiate this clause into an agreement if the organization doesn’t intend to conduct an audit?”

Auditing a supplier’s compliance or performance is good practice, not a negative reflection on the supplier or the strength of the relationship with the client. Auditing in a post Sarbanes-Oxley world is a corporate governance best practice, part of an organization’s fiduciary responsibility to its shareholders. Further, the marketing budget often represents a major portion of the organization’s selling, general and administrative expense. Auditing enhances transparency, improves processes and controls and insures that the legal and financial safeguards established by the advertiser in the contract are being adhered to. Further, audits provide substantive benchmarks on performance that form the basis for a mutual commitment to “continued improvement.”

So if the process is a positive one, the question remains; “Why do so few advertisers audit their marketing suppliers?” Unfortunately, U.S. based client-side marketing professionals and the agencies that make up their marketing vendor network don’t always take the view of audits as a positive, albeit necessary process to properly steward a firm’s marketing investment. The premise is simple, “trust but verify.”  The winners when a client conducts regular, audits of their vendor network are the groups that fear it the most… marketing and their agency partners. Ironically, even in the context of a dissolution of a vendor relationship, client organizations often forgo their right (if not responsibility) to conduct an audit. Exit audits can yield valuable insights, yield process improvements, insure that all billing and fees have been properly reconciled and that all intellectual property rights and assets have been properly transitioned.

The following quote from an anonymous source may best sum up the premise behind an audit; “In God we trust, all others we virus scan.” An effective audit process does not single out a particular supplier and pursue them in a vindictive manner. Rather, it determines a schedule, methodology and defines an approach that encompasses all members of an organizations marketing vendor network in a fair, even-handed manner.

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