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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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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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