Review your agency contract
In the clause on Audit Rights, it will not only set out the scope of any audit (and any limitations on the scope – see previous post), but it may also specify what type of auditor you can use.
There are different types of auditor I hear you say? I thought they all wore brown suits and kipper ties!
Well, sartorial choices aside, there are differences and it’s important to understand what they are and how it could impact the audit. In many agency contracts there will be clues that might not always be obvious to anyone other than a qualified accountant.
For example, if the audit clause says ‘Big 4 only’ it means that only Deloitte, KPMG, PwC or Ernst & Young can do the audit. If this is the case, you’ll be faced with a couple of issues, not least endorsing anti-competitive business practices if you limit yourself to these four firms (see previous post).
What each of the ‘Big 4’ has in common, however, is that they are firms of Chartered Accountants/Certified Public Accountants, which means that, as legal entities, they are regulated by a professional accountancy body, which should give you (and the agency for that matter) peace of mind that the people you are employing are professionally competent and suitably independent. If you have a clause like this in your contract, ANY firm of Chartered Accountants/Certified Public Accountants should be seen as an acceptable auditor (see previous post).
You might also have language in your contract that says very sensitive records of the agency may only be audited by an independent certified public accountancy firm. If so, it means that the ‘Big 4’ or any other firm of Chartered Accountants/Certified Public Accountants can be used. The reason you’ll often see this type of language in contracts is that for very sensitive information agencies want to be sure that both the individual auditors looking at the documentation and the firm that employs them are subject to the rules, regulations and ethical standards of a professional accountancy body. It’s all about keeping confidential information, well, confidential.
Ask yourself “Is the auditor suitably independent and subject to professional oversight?”
Some providers of marketing contract compliance services are not firms of Chartered Accountants/Certified Public Accountants, but rather consultancies staffed by qualified accountants who are themselves members of a professional accountancy body (that’s a confusing area too – in the UK there are five well-known accountancy bodies and you’re much more likely to find qualified auditors in three of them).
At an auditor that is actually a consultancy, the individual qualified accountants doing the work are bound by professional and ethical standards, but the legal entity you are contracting with for the audit is not.
Why is this potentially a problem? Data received for the purpose of a compliance audit should only be used for the compliance audit. It should not be used for subsequent consulting or benchmarking activities, as to do so would be unethical and in breach of the standards required of members of professional accountancy bodies. Consultancies that offer a variety of services, including contract compliance audits, can create conflicts of interest and cause themselves to lose their ‘auditor independence’ when acting on your behalf, if they are providing more than just compliance audit services to you. It’s for these type of reasons that statutory auditors are limited to the amount of non-audit work they can do at their audit clients. While compliance audits are not governed by the same rules as statutory audits, the principals from the perspective of a professional accountancy body in terms of auditor independence are (we know, because we’ve checked with ours).
While the individual qualified accountants working in these consultancies may be aware of the risks being taken, unless the majority of owners are also qualified accountants and ultimately answerable to a professional body, there is a good chance that the senior management will be unaware of the issues related to conflict of interest and auditor independence that they are potentially creating for themselves and their clients.
In an accountancy firm, that is not an issue as you can only be a firm of Chartered Accountants if you are majority owned by qualified Chartered Accountants who are members of the same accountancy body. This means that the professional and ethical standards apply at both individual member and legal entity level and, trust me on this, are always at the forefront of your mind as it’s your neck on the line in both cases!
Qualification is an easy one to verify – it’s either ‘yes’ or ‘no’. As part of your due diligence, check whether the individuals AND firm you are considering engaging are members of a professional accountancy body. All of the major accountancy bodies have a section on their website where you can check membership status. If you’re unsure which ones to look at in your country, wander over to your finance team and ask them. The one for the Institute of Chartered Accountants in England and Wales is here: Find a Chartered Accountant.
Beyond that ask yourself, is a consultancy going to measure up to a high enough bar in respect of professional and ethical standards? Is the work they do sufficiently rigorous? Could using them give rise to valid concerns about conflicts of interest and auditor independence, either from your organisation’s perspective or from the agency’s?
Furthermore, if a consultancy is not using qualified accountants/auditors to deliver the compliance audit services, consider whether it is suitably competent and qualified to take on the assignment in the first place. Know that an accountancy firm is obliged by its professional standards to tell you if it is not competent to do the work…
That doesn’t mean that you shouldn’t use a consultancy to do a compliance audit but, if you do, be aware of the potential risks that accompany it by seeking evidence of internal procedures to manage conflicts of interest and auditor independence issues, and manage them accordingly.
Does the audit firm understand how marketing services agencies operate?
Experience is a tricky one. Knowing and understanding the agency landscape is crucial. Your chosen auditor should not only be able to analyse the numbers, but also to interpret them within the context of the contract, apply their knowledge and make relevant recommendations. It’s about taking data and transforming it into intelligence that clients can act upon.
This is where your homework will really pay off. Find out who will be doing the audit and what experience they have in this area – is it media and creative agency specific or just audit in general? Within audit, is it statutory audit (i.e. auditing a company’s annual accounts) or contract compliance audit (see previous post)? How comfortable is the auditor with marketing agency contracts? Do they know how the words used in the contract should translate into the processes and practices at the agency to manage your account and your money?
Don’t be too worried about the experience the auditor has of your specific industry: they’re not auditing you, they’re auditing your agency. You may be surprised to find that how an agency manages your account is going to be very similar to the way it manages all of its clients, even if you’re in a regulated industry.
This is also true of geographic location. While there may be certain agency practices unique to a particular country (and you are likely to have these covered already in your local agency contract), accounting standards and practices are becoming ever more homogenous. The way a media or creative agency accounts for its income, third party costs and travel expenses is little different between countries and continents.
In practice, the three things that matter most when choosing the right compliance auditor are:
- does the auditor know how to audit marketing services agencies in all their various incarnations (i.e. media, creative, PR, CRM, brand activation, events, etc.)?
- are the individuals doing the audit work bound by the professional and ethical rules and regulations of a recognised accountancy body?
- is the legal entity you’ll be contracting with bound by the professional and ethical rules and regulations of a recognised accountancy body?
If an audit firm can answer ‘Yes’ to all of the above, you’re well on your way to finding the right marketing contract compliance auditor for the job.
If you’d like to find out more about Financial Progression and how we can support you in managing your agency contracts and relationships, please get in touch.