Contract Compliance Audits during the COVID-19 outbreak

Amidst the Coronavirus and COVID-19 pandemic, some insights and advice to help advertisers decide how best to pursue their marketing contract compliance audit programme in 2020.

Objective

To assist advertisers in deciding how best to undertake their contract compliance audit programme in 2020.

General considerations

1. Follow health advice and requirements set out by the government of the relevant country and the World Health Organisation.
2. Prioritise the safety of individuals in your business, at agencies and at your auditor.
3. Be mindful of the impact on the agency of decisions you have already made in response to COVID-19, such as changing budgets significantly or re-phasing the work during the current restrictions.
4. Be open to the use of technology to conduct the majority of the audit work remotely.

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:

1. are you continuing to spend with the agency?
2. is sufficient resource likely to be available in the finance and account management teams to support the audit?

For agencies:

1. is sufficient resource likely to be available to manage the audit process?
2. how much of the information requested is available in soft copy format / electronically?
3. can the information be shared with the auditors securely?
4. what information is so sensitive that it can only be reviewed on site?

For auditors:

1. are robust systems and ways of working in place to support audits carried out remotely i.e. without visiting the agency’s offices?
2. how much of the information requested is available in soft copy format / electronically?
3. what alternative procedures are required for information that can only be reviewed on site?

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.

Advertisers

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 even be asked to take a period of leave until the restrictions are lifted.

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 even be asked to take a period of leave 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.

Agencies

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 cash flow forecasting activities.

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.

Agencies are rightly concerned about how information is handled by auditors and historically they’ve tried to keep as much information on site to protect it. 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.

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

Auditors are likely to be used to undertaking 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.

We’ve been in touch with a number of agencies recently to kick off 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 currently 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 leave for a period of time.

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 government lockdowns, travel restrictions etc.

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:

1. Information that can readily be provided and/or worked on remotely:

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.

2. Information that should be available to be worked on remotely, though is subject to local ways of working and availability in soft copy / electronic file formats:

Invoices issued to clients, plans/SoWs/estimates, purchase orders received from clients, supplier invoices, reconciliations, reports issued to clients etc.

3. Information that can only be viewed at the agency’s offices

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.

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 in the year, 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.

Tips for a successful audit when conducted remotely

Clients should expect their auditors to demonstrate clearly that they are performing the following:

1. Set out clearly roles and responsibilities at client, agency and auditor
2. Ensure the scope of work and data request sent to the agency is SMART (specific, measurable, achievable/attainable, relevant and time-bound)
3. Set up videoconferences to review the data requested, formats expected and timelines agreed
4. Agree in advance specific times, formats and participants for queries to be raised, meetings to be held etc. in respect of the records provided for audit
5. Agree cut-off dates for provision of data and answers to questions raised, so that the detailed audit work has a clear ‘finish’
6. Hold an audit close meeting at the end of the detailed audit work (e.g. via video conference), so that key findings are raised with the agency openly and on a timely basis. 

Conclusion

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, it may be that the majority of contract 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.