Production Transparency – should advertisers outside the US be concerned?

Fourteen months after its landmark report on media transparency, the ANA has delivered another paper that raises concerns over financial transparency and conflicts of interest, this time relating to the US production industry. Following hot on the heels of the announcement at the end of 2016 that the US Department of Justice was investigating production practices, the report casts further doubt over the ethical values held by creative agencies and holding companies when it comes to managing their clients’ money.

Are non-transparent practices and conflicts of interest commonplace?

Since it was published, we’ve had a number of phone calls from clients wanting to understand how contract compliance audits of their creative agencies can help them to understand whether they’ve unwittingly engaged in non-transparent practices and been subject to potential conflicts of interest.

some brands are questioning whether their creative agency’s corporate values and ethics are aligned with their own

What’s arisen from those conversations is that many clients now expect their agencies not to be transparent with them financially (some would argue brands have themselves to blame by continually seeking to reduce agency fees, thereby encouraging agencies to find other sources of income). What has come as a genuine shock, however, is the inherent conflict of interest that exists if agencies are both managing the production bidding process and also acting as a bidder. As a result, some brands are questioning whether their creative agency’s corporate values and ethics are aligned with their own, and it’s for corporate governance and risk management reasons that they’re picking up the phone to speak with a marketing contract compliance specialist.

During those conversations, we’ve been asked consistently two questions:

1. is it worth auditing our creative agencies?
2. are the problems likely to be more widespread i.e. not only confined to the US?

Should I audit my creative agency too?

Concerns over media over the past 18 months have been so pervasive that many advertisers decided to carry out contract compliance audits of their media agencies for the very first time, having never previously considered the need for assurance/risk management in this area. The same advertisers are now interested in discussing audits of their creative agencies.

Our longest standing clients all dipped their toes into the compliance audit waters by engaging us to audit their creative and BTL agencies some time before they asked us to look at media. We therefore have a long and successful track record of auditing creative agencies and, in almost all instances, our clients have better working relationships with those agency partners now than they did before their first audits took place.

managed in the right way, the audit process helped clients and agencies to learn a lot about each other and how they perceived certain practices

So what did we find? Was it all plain sailing and the agencies’ books all as clean as whistles? Certainly not. But, managed in the right way, the audit process helped clients and agencies to learn a lot about each other and how they perceived certain practices, some of which were almost identical to those raised in the ANA’s latest report. The budgets under review were often quite large and the benefits from having another pair of eyes looking at the underlying transactions were plain for all to see. And yes, some of these agencies were based in the US, and many were based in other countries.

Digging deeper…

One of our most memorable experiences was for a global brand outside the US a few years ago. While on site at the agency, we were going through a reassuringly large pile of supplier invoices and, after a while, noticed that a number of the suppliers had exactly the same invoice format. This normally means that they’re using the same accounting package to create their invoices and it’s not uncommon to notice one or two suppliers with similar layouts. In this case, however, it was six!

We pulled out all the invoices and laid them side-by-side. What was immediately apparent was that yes, the invoices looked to be from a common template and there were different company/brand names at the top of each invoice. When we scanned down to the bottom of each invoice to see the company name, registered address and tax details, we found that they were identical!

the Chief Executive of this company was also the Finance Director of the agency we were auditing!

Googling the company name brought up a number of entries and, when we clicked on one providing company information, it became apparent that the Chief Executive of this company was also the Finance Director of the agency we were auditing! When we raised this with the FD, their response was that yes, it was a group company, in a separate division, operating out of offices in a different part of the city, that handled various aspects of the production and post-production process for the agency’s clients and others, using different brand names to differentiate between the various services being offered. Further investigation and analysis on the data provided to us for the audit showed that, once the costs of the production companies who had shot the TV commercials were stripped out, a significant proportion of the remaining costs were being directed to this company.

While, contractually speaking, the agency hadn’t done anything wrong, it did raise more than a few eyebrows at the client in respect of business ethics and the agency’s commercial model. Fortunately, a production specialist had been engaged for some time to critique the quotes in advance and, as a result, the client was confident that it was paying market prices for the work that had been undertaken. It was, however, the first time it had commissioned a compliance audit of a creative agency and the added benefit of specialist auditors looking through a very different lens to the production specialist was immediately apparent.

auditing its creative agency was worthwhile…because…the client now understood from multiple angles how the agency was managing its account.

For this client, auditing its creative agency was worthwhile and not because it led to money coming back – the presence of a production specialist meant that it was confident that market prices were being paid and costs properly authorised. It was worthwhile because, with the additional expertise a marketing compliance specialist brought to bear, the client now understood from multiple angles how the agency was managing its account. For the first time, the brand and procurement teams could make an informed decision as to how closely the agency’s working practices were aligned to their own corporate values.

A happy ending

this story has a happy ending for everyone: the client and agency are working more closely together than ever before…

The nature of the relationship has changed for the better, with the client being more aware and in control of the financial processes and practices in place at the agency, and the agency more aware of what the client’s expectations for financial transparency and management. And, we are pleased to say, this story has a happy ending for everyone: the client and agency are working more closely together than ever before and we audit the agency from time to time to ensure everything continues to work as intended – an insurance policy, if you will, to manage potential risks in the relationship before they become a problem.