Category

Contract Compliance Auditing

Why Do Agencies Seek to Limit Client Audit Rights?

By Contract Compliance Auditing, Letter of Agreement Best Practices No Comments

Assurance CollageAgency attempts to restrict client audit rights or limit record retention requirements through agency-centric contract language and negotiating tactics should be addressed in a direct manner by advertisers during the contracting process.

Efforts on the part of an agency to limit the scope of an audit, shorten the timeframe subject to audit, regulate audit methodology, restrict an advertiser’s right to select an audit partner or limit access to agency data that supports its billings to the client pose significant risks to an advertiser’s marketing investment.

Other than the furtherment of agency self-interest, there is no valid reason for restricting an advertiser’s right to audit an agency partner’s contract compliance and financial management practices. Given the materiality of marketing spend, agency compliance audits serve as a crucial governance control that enables advertisers to verify the accuracy of agency billings and prevent financial management practices that could negatively impact an advertiser.

The failure to secure the proper audit rights in client-agency agreements, or neglecting to exercise existing audit rights on a regular basis can lead to serious legal and financial repercussions.

Because the advertising industry operates primarily on an estimated billing model, where agencies receive client funds in advance of performance and before final costs are determined, greatly increases risks. This is exacerbated by the industry’s practice of delaying reconciling actual costs to estimated billings and the absence of third-party invoices supporting the costs being billed.

Blindly trusting agency billings without regular audits to verify costs increases the likelihood of errors, non-compliance, and bad financial management practices. Independent compliance audits often uncover issues such as:

  • Overbilling
  • Non-transparent fees or mark-ups
  • Timekeeping errors and irregularities
  • Unauthorized use of agency affiliates
  • Identification of earned but unprocessed credits, discounts and rebates
  • Under delivery of agency time-of-staff commitments (i.e., total hours, staff mix)
  • Failure to reconcile retainer or project fees
  • Process gaps that drive inefficiencies or legal risks, both internally and externally
  • Inordinately long lead times for processing third-party vendor payments
  • Failure to adhere to contract terms (e.g., competitive bid requirements, data privacy)
  • Use of restricted practices (e.g., principal media buys)

Unchecked, findings like these limit an advertiser’s working dollars and reduce the return on their approved marketing spend.

The good news is that periodic reviews of agency network partners can help identify compliance gaps, rectify mistakes, and encourage agency partners to be more mindful of their contractual obligations and client expectations.

As the 17th century French writer, Francois de La Rochefoucauld once intoned: “Self-interest makes some people blind, and others sharp-sighted.” The question is, which side of that equation do you want to be on?