‘Creative Accounting’ – Common Themes from Audits of Creative Agencies around the Globe

As more clients understand the broader benefits of auditing their agencies, many are exploring opportunities outside of media, bringing focus to bear on their lead creative and below the line agencies.

In the past 12 months we’ve conducted audits of creative agencies in North and South America, Europe, the Middle East and Asia for a variety of different clients and found five key themes that continue to recur.

Each of the five is readily addressable, though relies on appropriate direction being provided by the client and engagement from the agency; ideally expectations will be addressed clearly in the contract or, if not, in an amendment/addendum and formalised via regular reporting.

1. Reconciliations

At a creative agency (and below the line agencies too), each activity for a client is set up under a unique job reference in its accounting and project management systems with all actual income (fees) and expenditure (production related costs, other third-party costs and agency expenses) recorded.

When the activity is finished and all items accounted for, a reconciliation of the job should be:

• prepared within an agreed timeframe
• shared with the client in writing
• set out clearly estimated and actual fees, production costs and agency expenses with any differences highlighted
• use actual data from the agency’s accounting system (this is important)
• show the amount over or under spent versus the approved estimate

2. Reconciliations

Marketing, Procurement and Finance teams at a client should come to a consensus on how to handle overspends and underspends on jobs.

Should overspends be written off by the agency or reimbursed by the issue of an additional purchase order or transferred into a ‘surplus pot’ for offset? Should there be a rigid policy or a menu of options depending on the particular circumstances?

A ‘surplus pot’ is the pooling by the agency of under and overspends from multiple jobs on a single job until it receives instruction from the client to return or use the funds.

If you choose to use surplus pots (something we advise all of our clients against as they invariably cause issues), make sure your finance team is aware – it will make misunderstandings between the Marketing Director and Finance Director far less likely!

3. Reconciliations

The agency should be transferring funds between your jobs and/or surplus pots only after receiving explicit authorisation to do so in writing. It may seem bureaucratic, but a signed form is far more likely to be filed and available for inspection in the future than an email, protecting both you and your agency partner.

Of course one way to mitigate the impact of the agency failing to carry out job reconciliations thoroughly and on a timely basis, is by agreeing to pay on a 50:40:10 basis i.e. withholding 10% of the agreed estimate until a job reconciliation that sets out any remaining amounts to be paid is received. Indeed outside of Western Europe, this is often standard operating practice.

4. Reporting of agency time

Clients will typically pay their agencies either a retainer fee or a project based fee against an agreed scope of work. The scope of work will set out the roles, grades, hours, rates and total fee required.

While the fees may be fixed, clients may have wording in their contract that allows the inspection of time records. The client’s expectation is that, even though such fees are fixed, they will have access to records of the actual time spent so that client and agency can make future estimates as accurate as possible.

We are seeing an increasing trend for agencies to deny clients and their auditors access to time records for any kind of fixed fee (retainer or project) on the basis that, as the fee is fixed, the actual time spent is irrelevant.

If you feel differently, make sure that your contracts make it explicit that time records are to be made available to support all fees charged, whether fixed or variable, and ask for time summaries to be provided at least every six months, which can then be traced back to the time recording system during the next compliance audit.

5. Briefing

The number one agency gripe that we encounter across the globe is the poor quality of briefs received from clients. This goes for any type of agency and appears to have become pervasive – it appears that since the financial crisis of 2008/2009 Marketing Directors no longer have the size of budget that they once enjoyed to train their staff and, based on what we observe, this is having an adverse impact on their agency relationships that is often not obvious.

Poor quality briefs drive cost into your agency relationship as the agency will:

• take longer to understand what you want
• burning hours you’ve paid for in doing so
• leaving less time for ‘the work’
• making your account less profitable
• more difficult to manage, thereby
• reducing the motivation of the staff working on your account
• lowering the quality of output
• and taking longer to deliver the final product

In our opinion, one of the best investments a Marketing Director can make is training to ensure that all of their staff are skilled at briefing agencies.

While spending time discussing these five points with your agency and putting in new processes and practices to support their implementation may be time consuming, in the long run addressing each of them will help marketing procurement and brand managers feel more in control and enjoy more trusting and progressive relationships with their creative agency partners.