Supplier rebates – how confident are you that your agency is declaring them?

Most brand/agency contracts state that an agency needs to hand over to their client any rebates received from third parties used on their account, whether specific or on a ‘fair share’ basis (e.g. annual volume bonuses). The question is how do you know that you are getting all your rebates back? Our experience tells us that brand teams get short changed more often than they realise. The only way to really know whether you are getting all your rebates back is to do a ‘contract compliance’ or ’financial’ audit. In this article we explore a slightly unusual situation we were faced with recently when doing just that at a large agency.

We were coming to the end of an audit and doing the last day’s work on the ground. Similar to most other audits we do, we asked the agency Finance Director, “Do you want to declare now any rebates or discounts due to the client that you haven’t previously declared?”. At this point, there was a pregnant pause. I went on to explain to the Finance Director what tests we were going to do, why we were doing them and which suppliers had been chosen. The FD took it in and asked us to wait. After returning just under an hour later, he said, “If you go and do the testing that you’ve just described, you will find undeclared rebates”.

We went on to state that the suppliers selected were but a sample and, if there were rebates received from other suppliers, now would be a good opportunity to declare them which, to his credit, he duly did (at least for the period of time covered by the audit).

it became quite clear that the agency had been using the rebates to balance its books

As we carried out our tests it became quite clear that the agency had been using the rebates to balance its books and had been caught out. It was very embarrassing for the agency and even more so when the amount passed into six figures!

After the report had been read by the client, we found out they had asked the agency on several occasions whether there were any rebates due and had been told that there weren’t any. Considering that we had been asked to go in and do a limited scope audit, they were both pleased with and surprised by the findings.

it turned out that 25% of the external costs were with… one supplier

We also found something unusual, but apparently common for this type of agency in the country in question. When we were doing our testing we kept coming across invoices in a similar style, which normally means that the suppliers are using the same accounting package. At the top of the invoices were 5 different brand names. But when we looked at the bottom (normally where the name and address of the legal entity is written), the company name and address was always the same! When we added up the value of all these invoices it turned out that 25% of the external costs were with this one supplier.

the agency had a financial interest in it

Furthermore when we checked out the supplier using publicly available information, it became clear that the agency had a financial interest in it.

Whilst this was unusual, there was nothing technically wrong with it (i.e. in contravention of the contract). That said, the brand’s contract with the agency clearly stated that any individual item of third party spend over a certain amount should be triple bid (which is not uncommon). Individually all of the items fell under the limit but, in aggregate, they exceeded it many times over.

Lessons learned

Our experience with this agency taught us the following:

• Our audit methodology is sufficiently thorough to pick up most areas of non-compliance, even on a ‘light touch’ audit.
• Audits will provide insights that were not anticipated at the outset.
• Even if the contract states that all rebates need to be repaid to the brand, there is no guarantee this will happen.
• The only way to be sure is to have a contract compliance audit programme in place so that your agencies know their figures are going to be checked at some point.

In summary

Trusting your agencies is a good thing. Verifying that they are doing exactly what you have agreed is even better. It’s the only way you can be sure of what’s happened to the money you’ve handed over.