‘It’s in the contract, so it must be happening. Right?’

A major brand discovers that if you don’t look, you could be in for some surprises.

As a brand working with an agency, there are some fundamental things you expect to happen: output that meets your expectations, fees to be charged as agreed, reconciliations to be performed regularly.

We were approached by a well-known global brand concerned that some of these fundamental tasks were not being performed by one of its creative agencies. The quality of output is certainly not the sort of thing we as Chartered Accountants are professionally qualified to assess and hence we focused our efforts on the contract, fees and third-party costs.

The contract was actually a decent one, covering all the main cost elements in some detail with provision for reconciliation of time and third-party costs, as well as an audit clause which allowed a relatively high degree of transparency.

The mechanism for charging fees was clearly laid out in the contract using a standard methodology. Yet when we asked both the brand and agency for the fee mechanism used for the audit period, we found that it was different to what was written in the contract (and in fact advantageous to the brand). When we pointed this out to both parties (it did seem to have occurred as result of a genuine mistake), the agency interpreted the contract as written and the brand as per custom and practice. Who do you think was then asked to act as independent arbiter?

This meant that the brand had been overcharged fees by approximately 13%, close to a seven-figure sum.

However, the plot thickened somewhat when we then asked for a detailed breakdown of the fee calculation from both the brand and the agency. Well, it transpired that the brand hadn’t ever been given one by the agency and, when we finally got to the original spreadsheet prepared by the agency (via a fairly circuitous route), it transpired that there were some hidden columns that contained calculations not covered by the contract. This meant that the brand had been overcharged fees by approximately 13%, close to a seven-figure sum.

When it came to reconciliations, the agency had not been performing them for time or third-party costs in accordance with the contract, which meant that the brand was owed a substantial amount of money, some of which dated as far back as five years earlier. The brand knew that it was owed money and that reconciliations were not being performed, but when the agency was pressed for them, did not get a satisfactory response. It was only when we went in to audit and had a ‘Finance Director to Finance Director’-type conversation that everything came to light.

Suffice to say that the findings from the audit uncovered that the brand had been significantly overcharged and it is now wondering what its other agencies might be up to!

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