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By Adrian Jenkins
Financial Progression has put together a helpful guide to assist advertisers in deciding how best to undertake their contract compliance audit programme in 2021.
If remote auditing delivers a positive experience (and early signs suggest that it does), it may be that the majority of the work in a contract compliance / financial audit will in the future be conducted remotely
Virtually every business is feeling the impact of Coronavirus. Advertisers, marketing agencies and auditors are no exception and have a specific set of challenges and opportunities to consider.
To help the advertising and marketing industry, I have looked at all of these aspects from the perspective of all the players — advertiser, agency and auditor.
To assist advertisers in deciding how best to undertake their contract compliance audit programme in 2021.
Q: Should contract compliance audits start or continue during this time?
A: Yes, where it makes sense to do so for all of the parties involved i.e. advertiser, agency and auditor. All three need to be in the same frame of mind for an audit to be undertaken successfully.
Q: What are the main considerations for advertisers, agencies and auditors?
A: For advertisers:
A: For agencies:
A: For auditors:
If the majority of the answers to the above are yes or positive, then an audit should be able to proceed.
Let’s explore each of the above in turn
If you’ve told the agency that you’re not going to be spending any money until the lockdown restrictions in the relevant country have been lifted or conversely are ramping it up significantly, think about whether now is the right time to conduct the audit.
While agencies are flexible organisations, significant peaks or troughs in demand will have an impact on their staffing and ability to respond to an audit request.
Currently agencies are prioritising clients who are continuing to spend. The implication of that is, if you are not, some of the staff working on your account may be moved on to the accounts of other clients and some may be furloughed or on reduced hours until the restrictions are lifted. If this is the case, then there may not be the staff available in either the account management or finance teams to support the audit.
If your business is experiencing high demand and you are advertising more (yes, some advertisers are in that position), resources available at the agency may be very stretched and unable to accommodate an audit as well.
If you are continuing to spend at similar levels to previously, then the staff are likely to still be available and may even have a little more time than usual to focus on an audit. Don’t take that for granted though and make sure you have an open and honest conversation with the agency. In our experience, if an agency is going to struggle to support an audit, it will tell you upfront and have genuine reasons.
We haven’t seen agencies using the current situation to avoid an audit taking place. The vast majority of agencies are doing their very best to maintain a business-as-usual position such that audits can take place, albeit with certain important differences driven by the fact that auditors will not be able to meet with agency staff at their offices until it is deemed safe by the authorities to do so.
Each agency will be experiencing its own unique set of circumstances. Fundamentally they are concerned with maintaining normality as far as possible and the ability to service the needs of clients when the restrictions are lifted.
Audits are time-consuming for finance and account management staff in particular. Senior finance staff are currently heavily involved in budgeting and cash flow forecasting activities for 2021 and, as the end of the year approaches, their own financial reporting and statutory audits.
The vast majority of detailed information required for an audit is compiled by account management teams (e.g. plans, SoWs/estimates, client purchase orders and reconciliations) and operational finance teams (e.g. supplier invoices, invoices issued to the client and reconciliations). Hence the availability of these staff is key.
The next most important factor is the availability of that information in soft/electronic format.
Many agencies now scan every supplier invoice that is received in hard copy format and many already require suppliers to send in invoices by email as PDF files. Some agencies will even be using cloud accounting software and attaching copies of invoices to the relevant accounting entries.
Similarly, account management staff will often keep copies of approved plans, SoWs, estimates and purchase orders on their computers or on shared network drives, meaning that this information is likely to be readily available.
Agencies that keep a lot of information in hard copy format will be looking to understand where that information is stored (e.g. in their offices or at an external storage facility) and how long it will take to retrieve that information safely and then scan it. If a lot of the documentation is in hard copy, it may simply be best to postpone the audit until a later date. If, however, it only represents a small proportion of the documentation, it may be possible to provide it now, or at a later date, in such a way that doesn’t put employees at risk or impact on the overall output of the audit.
In the current circumstances, however, clients are looking for their agencies to embrace the technological solutions available to enable audits to take place, while ensuring appropriate safeguards exist. Based on what we have seen over the past 6 months, agencies have risen to that challenge as long as they have had sufficient staff available (i.e. not on furlough or reduced hours).
Most auditors now have in place data repositories that have auditable transaction logs to exchange information securely with clients and their agencies alike. Agencies also have systems for the secure sharing of data that auditors can access.
That said, there is information that agencies deem to be so sensitive that they are only willing to provide access to it within the four walls of their offices. Typically this relates to contracts with suppliers, covering both pricing and rebates/AVBs, and payroll records of agency employees. Agencies are not changing their positions on this, even in the current circumstances, which is understandable.
Auditors are likely to be used to undertake a wide range of audit activities remotely aided by readily available technology, such as secure file sharing platforms, videoconferencing applications, email and even telephones (!). They should therefore be in a position to conduct most, if not all, of the audit work remotely using these tools while adapting existing ways of working with agencies as necessary.
Over the past 6 months, we’ve been in touch with a number of agencies to kick off media and creative audit programmes and have found them doing their very best to allow the audits to go ahead as planned within the confines of what is possible in their businesses.
There will of course be some agencies who are reluctant to do so, mainly, in our experience, because clients have stopped spending with them and, as a result, they’re having to move staff onto other accounts or place them on furlough or reduced hours for a period of time. Happily the situation is easing now with most agency staff now back on normal hours, even if they are not back in their offices. Some agencies have had to make staff redundant meaning their overall capacity for handling audits is lower than it was previously. This has meant that the elapsed time of audits has increased as agencies take longer to collate the information requested.
Agencies recognise that all parties have businesses to run and keep going and are doing what they reasonably can to help facilitate client audits, while working within the reality of lockdowns and international travel restrictions.
Below we set out a list of information that is typically requested during an audit, along with how we see agencies responding to those requests in a remote audit situation:
Agency/auditor NDAs, audit scopes of work and data requests, reports used for high level review of transactions within scope of the audit along with sample selection, meetings with agency employees, audit kick-off and close meetings, draft audit reports and feedback thereon, review and signature of letters of representation and any other end of audit formalities.
Invoices issued to clients, plans/SoWs/estimates, purchase orders received from clients, supplier invoices, reconciliations, reports issued to clients etc.
Records supporting the calculation and substantiation of rebates/AVBs (including access to the agency’s contracts with suppliers) and, where relevant contractually, access to payroll records of staff working on the accounts to validate fees charged.
Most of the audit work undertaken requires documentation that falls into categories 1 and 2 above and therefore should, in most situations, be able to be audited remotely.
Clients and auditors should expect that records related to rebates and payroll will only be shared at their offices and therefore will need to be audited later, once restrictions are lifted.
From the perspective of an auditor, this is not an issue and, for AVBs/rebates, it is increasingly becoming common practice for audits of media agencies conducted in the first half of the year to have AVBs/rebates audited in Q4: a separate report is added as an addendum in support of the recommendations contained in the main audit report.
That said, the longer Covid related restrictions are in place that prevent agencies from ‘welcoming’ auditors to their offices, the more pressure clients and auditors will seek to exert to find ways of sharing this very sensitive information remotely. After all, much of the work that is not getting done relates to auditing rebates and AVBs, which are often a significant source of income to the marketing budget. Furthermore, clients’ protocols will not allow them to pay media and creative audit fees in full until all of the work has been completed, which causes problems for both them and their auditors in balancing their books.
Tips for a successful audit when conducted remotely
Clients should expect their auditors to demonstrate clearly that they are performing the following:
We expect that many clients will want to continue their audit programmes as normal and, in most cases, will find their agencies and auditors willing and able to collaborate. For all parties, the conduct of audits almost entirely remotely will be a new experience: detailed planning, clear communication and a great deal of patience will be required to ensure successful outcomes.
Indeed if remote audits provide positive experiences (and the feedback from media agencies is that it is a more efficient way of working), it may be that the majority of the work undertaken in compliance / financial audits in the future will be conducted remotely, with travel to agency’s offices taking place only for work that absolutely has to be done on site. This will have the added benefit for clients of reducing both travel costs and their carbon footprint.
About the author
Adrian Jenkins qualified as a Chartered Accountant with Coopers & Lybrand (now PwC) and has held senior positions in Finance focused on Procurement and Supply Chain, Marketing and Business Process Transformation.
He founded Financial Progression in 2008 and has developed it into a Chartered Accountants specialising solely in contract compliance audits of marketing and advertising agencies.
Adrian has conducted contract compliance audits in the UK, USA, Canada, Ireland, the Netherlands, Germany, France, Spain, Italy, Turkey, China, Russia, South Africa, Dubai, Singapore and Brazil.
The views and opinions expressed are solely those of the contributor and do not necessarily reflect the official position of Producers & Procurers iQ or imply endorsement from the publisher