9 things you really need to know before doing an exit audit

Very often the first piece of work we do for a brand is an exit audit after it has parted company with an agency. Here we look at what you really need to know before doing an exit audit.

We’ve completed many exit audits over the last five years. Not unsurprisingly, there are a set of standard questions that clients often ask us about exit audits. So, we’ve put these down into your very own crib sheet:

1. When should we do the exit audit?

Assuming your audit rights extend beyond the termination date, exit audits really need to be done after your last project with the agency has been completed. If you go in too soon, e.g. straight after exit point, the agency will not have had time to sort out third-party invoices and get its accounting records ready. Of course, we can go in earlier, but this will probably add extra cost as we will need to review the figures in two tranches rather than just one.

If your agency contract only contains audit rights during the term of the agreement, the exit audit will need to start before your last project with the agency has been completed.

When you know you will serve notice on your agency, it is worth giving us a call so we can discuss the particular timescales for your situation (every one is in some way unique) and talk you through the next steps for an exit audit.

2. What’s the time lag between a project finishing and the invoices and accounting records getting sorted?

Not every agency is created and run the same way! For example, a media agency will normally be invoiced by media owners within a month or two, while suppliers to all other types of agency (creative, sales promotion, PR, digital etc.) may take up to 3 months to send in their invoices.

If you’re unsure about the best time to bring us in, give us a call at the point you’re serving notice to your agency and we will advise on the best time to carry out the audit.

3. Why do rebates need to be treated differently to other transactions with third-party suppliers?

Agencies will often do volume deals with their third-party suppliers. Most agency contracts these days state that third-party supplier costs must be passed on at cost (you will be amazed at how many times they are not!). This means that if an agency has secured a volume discount on a service, then its clients will be owed a proportion of this discount or rebate. For example it’s very common for media agencies to share the rebate they receive on Outdoor media.

Most agency contracts these days state that third-party supplier costs must be passed on at cost (you’ll be amazed at how many times they’re not!)

With me so far?

Volume rebates, however, will not be be finalised until after calendar year end as they are based on 12 months’ worth of spend. This means that rebates can only be reconciled, and subsequently audited, 3-4 months after the end of the calendar year. This is why rebates need to be treated differently to other transactions with third-party suppliers.

4. Why do you need to know whom we have worked with and where before you can give us a quote for the work?

It can seem strange that before we can quote, we need to know how much you have spent with whom, in which location and on what (fees, third-party costs, media type, etc). We need to know this detail because we literally need to match up every invoice issued by the agency from every billing point. Only then can we calculate the time we will spend auditing your agency. One client didn’t feel able to show us its agency contract before we quoted, even though we had already signed an NDA. In order for us to provide an accurate quote we asked them to fill in a table showing the agency name, location and spend in last 12 months, broken down by media type. For a media agency it’s important that we know the media type before we quote, as we can audit TV much more quickly than digital, even though in value terms TV spend is often much higher. For other types of agency, it is important to know the split between fees and third-party costs for similar reasons.

5. Is time reconcilable per the contract? Are we looking at fees here or just third-party costs?

It depends on how the basis of charging is set out in the contract. Sometimes we are required to reconcile both fees and third-party costs, other times just third-party costs. On an audit where time was reconcilable, we found that the agency was not charging the brand using the agreed fee mechanism, meaning that hourly rates were overstated. As a result, a not insignificant amount of money was due back from the agency to the brand.

6. Can we audit everything?

The answer is, unfortunately, no. We can only audit the stuff covered by your right to audit. That is typically set out in the audit clause in the contract you signed with your agency. Let’s take a typical example of where we can sometimes hit a brick wall. Many standard agency contracts have a confidentiality clause which only allows us to audit information on the client’s account. This means we are often not allowed to audit any volume rebates earned by the agency, as these reference other clients’ accounts.

7. Does it matter if the agency fee contains a performance-related element?

It sure does! As auditors we need to be able to verify what the performance-related element was meant to be, whether it was actually earned and, more importantly, whether it was paid out at the correct rate. It doesn’t always, but a performance related element to an agency’s fee can add a level of complexity to an audit.

8. Is it easier to audit an agency you’ve audited before?

Almost definitely. At one level we know many of the key members of staff involved. At another level, we already have familiarity with their systems and processes as well as the specific terms of the contract. What we find is that when we re-audit an agency for a client, it’s a much easier experience second time round. Typically, the brand will have taken us up on some of our recommendations from the previous audit, so they and the agency have far tighter processes and greater financial control.

And, because we’re specialists in our field, there are a number of agencies whom we have audited multiple times.

It doesn’t matter too much if someone else has previously audited your agency. We will just need to understand the top line results of the previous audit as, if we have this information, there may be less work for us to do or specific areas to focus on. Next, of course, we will need to know the period that the previous audit covered. After all, we don’t want to go over, and you don’t want to pay for, old ground that’s already been audited.

9. Why are you asking us if our media agency is currently providing reconciliations for ad serving?

This is something which only impacts us when we are auditing digital media. So much of display advertising is done on an estimate. When your agency puts in a budget it will, therefore, be based on an estimated number of impressions. Common practice is that if the agency ends up serving more ads than the estimate, the brand doesn’t pay any more. But if there are less ads served than the estimate, then the agency will only charge you for the actual number. Consequently, reconciling the actuals back to estimates for ad serving costs is fiddly and time-consuming. In the grand scheme of things it’s not big money, but could be worth a few thousand pounds here or there.

If you have any more questions about exit audits, just get in touch.

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