On June 7, 2016, the Association of National Advertisers (ANA) released a report after an eight-month investigation that found US advertising agencies systemically padding their profits by using non-transparent practices such as taking rebates from media companies and not disclosing them to clients.1

The report’s findings will lead many marketers to renegotiate their contracts with their current agencies, appoint auditing firms to assess monetary impacts and potentially cause some marketers to switch agencies—or possibly take media buying in-house.2   Many believe the Securities and Exchange Commission should be involved, especially if evidence of criminal behavior or fraud is found for those marketers that wish to take the matters further3.

Background:

From October 20, 2015 through May 31, 2016, K2 Intelligence (K2) conducted an independent study of media transparency issues in the US advertising industry on behalf of the Association of National Advertisers (ANA).  K2 released a 58-page report stemming off 150 individual sources and interviews conducted, representing a cross-section of the US media-buying ecosystem.4

Report Findings:

The findings determined that nearly 50% of the media buy sources had direct experience with non-transparent business practices, including rebates and principal transactions, enabling potentially problematic practices.5 Substantial evidence of non-transparent business practices were identified at Agency Holding Companies as well as independent agencies across digital, out-of-home (OOH), print, and television media channels.6 Furthermore, senior executives at agencies and Agency Holding Companies were aware of, and even mandated some non-transparent business practices, suggesting high-level buy-in.  Below is a summary of the findings:7

  • Non-Transparent Rebates: sources identified undisclosed rebates structured as financial incentives in the form of cash, free media inventory credits, or “service agreements” in which media suppliers paid agencies for non-media work such as research or consulting.
  • Non-Transparent Markups: the report discovered that agency holding groups would buy media ahead of time engaging in “principle transactions” and sell back to clients at markups (30%-90%) without disclosing the original purchase price.
  • Deceptive Treatment to Clients: sources mentioned media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to the highest-margin media, regardless of whether or not these purchases were in the clients’ best interests.
  • Dual Rate Cards: the reports found that agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.

What this Means for Marketers:

There are multiple actions marketers should be taking following the release of the ANA report.  Marketers are strongly encouraged to meticulously review and potentially renegotiate their contracts with their current media agencies.  Additionally, some marketing firms may appoint auditing firms to assess whether media money should be refunded.

However, more stringent auditing and contract terms won’t solve every issue raised in the report. Some firms may be prompted to rethink their agency spend and potentially bring their entire media buying in-house. While this is a complex process, the possible benefits of “controlling” all media expenditures with the firm’s best interest in mind, could be potentially important.

It should be noted, however, that the study itself cannot quantify the monetary value loss from the actions of some media agencies, and that the amount would vary from firm to firm based on a number of factors. Therefore, one early step in determining a course of action for any firm is to use auditing to understand the potential value loss created from non-transparent practices carried out by their media agency.

 

References

  1. “Ad Business Full of Nontransparent Practices, Study Finds,” The Wall Street Journal, June 7, 2016. Access at: http://www.wsj.com/articles/ad-business-full-of-nontransparent-practices-study-finds-1465303654.
  2. “Bombshell report claims US ad agencies unethically pad their profits with secret rebate schemes,” Business Insider, June 7, 2016. Access at: http://www.businessinsider.com/ana-report-alleges-widespread-ad-agency-kickback-schemes-2016-6.
  3. “ANA’s K2 Report: Evidence of ‘Pervasive’ Agency Rebate Collection,” Advertising Age, June 7, 2016. Access at: http://adage.com/article/agency-news/ana-k2-find-evidence-pervasive-agency-rebate-collection/304347/.
  4. Ibid.
  5. “ANA Independent Study Finds Rebates and Other Non-Transparent Practices to be Pervasive in U.S. Media Ad-Buying Ecosystem,” Association of National Advertisers, Jun 7, 2016. Access at: https://www.ana.net/content/show/id/pr-media-transparency.
  6. Ibid.
  7. Ibid.

Newsletter Author: L. Matthew Perry, Jenna Kniep, Kevin Rettig

Newsletter Contact Person: Nghi Pham

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

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