FirmDecisions team is preparing to attend the 2024 ‘Great Audit Minds’ Conference in Las Vegas, run by the Institute of Internal Auditors. The company’s MD for North America, Ardit Bejko, considers the very real benefits of a partnership between an Internal Audit team and an independent contract compliance expert.
If you’ve ever worked client-side, you might have talked about agency contract compliance, especially when discussing transparency initiatives with teams from marketing, sourcing, or finance. At FirmDecisions, we approach such an audit as a critical governance tool that answers different questions and delivers distinct value to each of these teams.
Asking smarter questions
Over the years, we have found that internal audit teams often bring a unique lens and ask questions that our contract compliance audits can interrogate on their behalf. These include:
- How effectively are we using the investment with our marketing agency partners?
- How well is the operational and financial governance of external agencies working?
- How can we use what we find to improve governance at all levels?
When one plus one makes more than two
There’s a natural meeting point between the external partner focus of an agency contract compliance audit and the inward view of an internal audit team. When joined up, they strengthen governance, risk management, and transparency across a company’s marketing ecosystem.
Companies in sectors such as Consumer Goods, Technology, Communications, and Retail invest between 8% and 14% of their revenue in marketing. It’s essential to have the right checks and balances in place to ensure that this spend is accurately recorded and managed.
Internal audit’s scope of marketing oversight does establish a level of control when comparing services rendered with what was requested. Control testing can address many aspects of the marketing cycle, such as purchase order approvals and adjustments, contract approval based on charts of authority, three-way matching, and accruals. However, internal audit checks cannot dig into the actual level of servicing that an agency provides or the hidden costs from agency affiliates.
The benefits of an independent expert partner
An external audit of your marketing agency partners will bring additional visibility to the embedded controls built into marketing agency agreements.
For instance, agency remuneration is often tied to requirements around key personnel, vacant positions, and minimum variances from agreed-upon staffing plans. Agency audits can provide visibility into these areas and ensure compliance with an organization’s expectations outside of agency self-reporting. They can also analyze commission on items outside of net media for appropriate application and invoicing.
Annual Volume Rebates (AVBs) are another significant area where internal controls alone cannot provide the necessary transparency across an advertiser’s ecosystem. It’s critical to review your agency’s vendor contracts and test these against a deep understanding of typical market incentives. The goal here is to close the loop on any hidden benefits owed back to the advertiser.
Other high-value areas that agency audits can bring to light for an internal audit team include:
- Using agency affiliates without proper authorization
- Marking up Inventory media
- How cash neutrality can impact working capital
- Balances on Audience Deficiency Units (ADUs) that should be booked to the balance sheet
- Media expenses that are misclassified and rolled up into top-line agency invoices.
Summing up
When combining internal controls with an agency audit, advertisers can increase transparency in their marketing spend and identify areas to strengthen operational processes. Audits can identify areas that may be well controlled at the organization but need improvement on the agency side. They also test the agency agreement in real life and identify gaps to better align with existing controls.
Internal Audit teams partnering with a strong and experienced contract compliance expert can improve controls, mitigate risk, and enhance the working relationship with agency partners. The right expert will speak the language of your marketer stakeholders, understand the nuances of the agency ecosystem, and articulate a road map that internal audit can champion in a management’s action plan.
