Close-Up: Live Issue - Does adland need to clean up its act?

The Ogilvy affair does little to improve the industry's image problem with clients.

Last week's guilty verdict in the US trial of the two former Ogilvy & Mather executives Shona Seifert and Thomas Early is in danger of fuelling clients' perceptions that the advertising industry is at best run by financial incompetents, or at worst susceptible to deliberate and premeditated fraud.

The inside story can be found on page 18 of this issue, but the case will resonate well beyond the US. While Ogilvy has distanced itself from the pair and claims to have introduced rigorous new accounting procedures to prevent this happening in the future, the damage to the industry as a whole is done.

After a two-year investigation, Seifert and Early were found guilty of conspiring to defraud the Office of National Drug Control Policy by fabricating timesheets in order to increase the agency's margins.

To add to concerns about the probity of agency financial dealings, the convictions were announced during a Flextech investigation into alleged illicit payments, or sur-commissions, made by its UK sales house, ids, to agencies for increasing their ad budgets to its stations.

The resultant impression of the advertising industry, therefore, is that it does not deserve unreserved trust from clients and is in need of cleaning up its act.

The reason why some agencies or individuals succumb to the temptation of fiddling the books is clear; they operate in a super-served market and have seen their profit margins squeezed by procurement directors.

The creation of media dependents and independents forced ad agencies to abandon the 15 per cent flat commission system, leaving a variety of agency remuneration techniques sufficiently opaque to allow corruption to happen among the less scrupulous.

It's not a new problem, either.

In 1997, executives at the now-defunct UK agency Goddard Niklas Delaney DeRoos were accused of swindling the American Soybean Association out of almost $1 million. Sue Goddard, the agency's chief, faced extradition to the US after a two-year investigation.

At the heart of the issue is the inability of agencies and clients to agree a remuneration method for intellectual property. Timesheets were introduced as part of the move towards making agencies act like clients' business partners, but, as the Seifert and Early case shows, this has done little to improve the industry's reputation.

Auditors are, of course, poised to capitalise on this confusion in the market. But effective change needs to be led from within the industry. The possibility of using a ratecard to charge for its services has been widely dismissed as unworkable. But some hope comes from Value Framework, a joint ISBA and IPA initiative to see if there is a better way to determine what agencies are paid.

If the battered reputation of the ad industry is to improve, there is a compelling argument that Value Framework's publication and subsequent adoption by the industry cannot come soon enough.

- Leader, page 22

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FINANCE DIRECTOR - Peter Walker, director of finance and operations, Clemmow Hornby Inge

"Does the industry need to clean up its act? No. The industry is transparent and the Ogilvy case has its own very unique set of circumstances from dealing with the US government.

"What we can all learn is the importance to agree the precise rules on how agencies should bill at the beginning of a relationship. Few clients today are prepared to buy creative services hour by hour, in the same way we might engage a lawyer or accountant.

"Procurement initiatives could lead to more clients trying it out, but the reality remains - paying for our services based purely on hours recorded on timesheets is perhaps the least sensible of many options available to an advertiser."

CLIENT - Peter Buchanan, deputy chief executive, COI Communications

"We expect agencies to be honest and transparent in their dealings both with clients and their own suppliers. However, advertisers also have a responsibility to ensure the necessary controls are in place to identify mistakes, human error and any potential financial mismanagement. In this regard, the cost of investing in systems and independent auditing will pay for itself many times over.

"If you have a robust and detailed system for estimates, quotations and invoice reconciliations, plus a clear agreement regarding which charges are acceptable and which are not, the type of problem that has arisen at Ogilvy in the US should never occur."

ISBA - Debbie Morrison, director of membership services, ISBA

"All clients are asking for is greater transparency and honesty in dealings with their agencies. I think the impact of this case is that agencies are going to find their clients approaching them and asking for safeguards and reassurances and if not satisfied, I'm certain they will send in the auditors.

"The issue of fraud is serious in any industry and it is only good business practice to ensure that the two parties are clear on what management systems and controls are in place so that the contractual terms agreed are adhered to.

"If my business with the agency were based on people and time, I would be foolish not to discuss these issues with my agency."

LAWYER - Giles Crown, partner, Lewis Silkin

"Look at any industry hard enough and you'll discover some dubious practices. But, like tax avoidance and evasion, there's a big difference between going as far as you can and sometimes a bit too far in squeezing as much income from an account as possible, and setting out intentionally to overcharge a client knowing that you are not entitled to the money.

"The latter is tantamount to theft and clearly not acceptable, but I'm not aware of such flagrant activities going on in the UK. But, then again, the lawyer's probably going to be the last person to know."