I was recently chewing the cud with an FD who had previously worked for 20 years within one of the large agency groups. As the conversation went on, it confirmed much of what I had come to suspect. Let’s put it diplomatically…if the agency knows it is likely to be audited by a particular client, it tends to work even harder to make sure that its financial dealings with that client are all correct, as the last thing it wants is an embarrassing conversation with the brand team or colleagues in group head office.
As a consequence, it made me reflect on how many of our clients have developed their thinking as time has passed over their use of contract compliance audits of their advertising and media agencies. When we first start talking to brands, there are often two primary concerns: 1. that their and/or the agency’s contract management processes are not as robust as they might be; and 2. that something has gone wrong financially but they need help in pinpointing precisely what and where.
Once the brand has seen the benefits of a well-balanced contract compliance audit report with specific recommendations on how to fix the areas of concern, its thinking shifts to see a compliance audit as an insurance policy to make sure that the agency (and brand) is actually meeting all its commitments under the contract.
So, once they’ve reached this stage, what do they tend to do?
1. Put regular reporting processes in place
Many of the largest financial mishaps we have identified over the years have occurred as result of reconciliations (for both time and third-party costs) not having been done accurately or at all. Brands that put regular reporting processes in place are able to keep a close eye on the numbers on a day-to-day basis and can often identify discrepancies soon after they have happened.
2. Create an audit strategy
One of our very large clients found that, after one audit, it was due nearly a million euros back from the agency. As a result the company is in the early days of instigating a structured audit regime so that, of its ten or so most important agencies, three or four of them will get randomly audited every year.
It would not be a surprise to find that, with the regular reporting in place, the agencies with more instances of errors or unusual trends in the numbers during the year are the ones that end up being selected for audit.
3. Let their agencies know that they will be audited
Experience tells brands that agencies take greater care of the financial side of the account if they know their work is going to be checked by an independent specialist. A number of our clients, particularly when starting new agency relationships, make it very clear to the account director they audit their agencies. One has even gone so far as to agree in advance an auditor NDA with one of its largest agencies, so that it knows we will be able to get on site within the number of days stipulated in the contract.
4. Carry out compliance audits of their agencies
Most commercial contracts these days have some form of audit clause and agency contracts are no different. Yet there are still a large number of brands that have never invoked their rights under the audit clause. We tend to find, and admittedly our perspective may be somewhat skewed, once a brand has carried out an audit of one agency, more are likely to follow. After all, if the review has picked up discrepancies at one agency, who’s to say that similar issues do not exist elsewhere? The only way to find out is to check.
With these four steps firmly in place, brands can be confident that their agency finances are well-managed and controlled. The agencies themselves recognise when a client is taking an interest in the account and, in most instances, it makes life easier for the agency too. For example, if a discrepancy is identified on the account, in such an environment the agency knows it can approach someone at the client and resolve the situation quickly, rather than allow it to fester and become a more visible issue later on.
An audit ‘regime’ also gives the marketing director enhanced peace of mind…
An audit ‘regime’ also gives the marketing director enhanced peace of mind. I was discussing the benefits of a regular audit regime with a potential client recently and was asked how our work integrates with internal audit. I explained that our work actually helps the marketing director ahead of any internal audit work, as it gives him or her a detailed financial overview of the agency’s handling of the account as well as any internal weaknesses in process that may be a contributing factor. Hence we provide in advance the answers to the sort of awkward questions internal audit will be asking. The really proactive marketing director, in fact, will have already shared our report with their marketing financial controller and formally asked for support from the finance team to validate the findings and implement the recommendations. In such circumstances, the FD cannot be anything other than impressed by his or her marketing colleague’s stewardship of the annual marketing budget!
While it is lovely to receive an unexpected windfall after a contract compliance audit, a structured audit approach towards all of your agencies will give you, over time, the peace of mind that you really do have financial trust and transparency with them.