The Financial Times reports the sobering story of marketing and ad agency group Interpublic who, after over 400 acquisitions and global expansion, found itself having to restate its accounts for the past ten years and be the subject of an SEC investigation into its accounting practices:
[…] The company discovered “instances of deliberate falsification of accounting records, evasion of taxes in jurisdictions outside the United States, inappropriate charges to clients, diversion of corporate assets, non-compliance with local laws and regulations, and other improprieties.” In terms of their impact on Interpublic’s restatement, the biggest problems were in Turkey, where the company has said it might fire senior local managers at its McCann and FCB agencies.
And if that wasn’t enough:
A more subtle issue facing Interpublic involved legal local business practices. One such question turned on vendor discounts or credits – cash that agencies receive in return for buying large blocks of advertising time or space on behalf of clients. In Latin America, the Mediterranean and other regions, agencies often keep this money.
Interpublic’s problem was that this practice was difficult to reconcile with some of its global contracts with clients and with its obligations under US GAAP. It is clearly trying to make amends. Paying back this money accounts for most of the $250m that Interpublic has set aside to compensate hundreds of counterparties under the restatement.
[…] Advertising agencies face the risk that their more distant outposts will not produce enough revenue to justify the cost of compliance with Sarbanes-Oxley. This is a big issue for Interpublic. While discussing the earnings restatement, Interpublic executives said overall professional fees – mostly for compliance with Sarbanes-Oxley – represented 4.7 per cent of the company’s $2.9bn in first-half revenues. If that trend continues, and the company suggests that it will, Interpublic could end up spending an astonishing $300m this year on accountants, lawyers and other professional service providers. That compares with professional fees of $28.5m as recently as 2002.
The lengthy FT feature considers the role of Michael Roth, Interpublic’s chairman and CEO, and what he’s been doing to clean Interpublic’s house since he assumed the top job last January. The FT reports that Roth’s learning experiences include:
- Get accounting systems in place before you go global. Interpublic’s financial woes have been compounded by a failure to unify its operations’ IT systems.
- Beware of “local business practices”. Interpublic has found it hard to reconcile legal activities in foreign countries with the demands of US accounting standards.
- Think hard about Sarbanes-Oxley. Interpublic could spend as much as $300m this year on professional services. Not all foreign opportunities are worth the accounting costs.
- Follow the clients. More big corporations are giving global advertising assignments to streamlined networks. Marketing services holding companies should take note.