How it all adds up: Accounting

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Don't expect any ad-agency company chiefs to plead the Fifth before Congress over how they've kept their books, say industry observers. But agencies still must grapple with accounting issues.

Agencies have fairly straightforward cost structures with revenue from commissions and fees and basic expenses such as salaries and office space.

"It's very difficult, if not impossible, to fudge that," said David C. Wiener, senior partner of David C. Wiener & Co., a New York accounting firm specializing in the advertising field.

Added Sean Orr, exec VP-chief financial officer at Interpublic Group of Cos.: "Our business model is very simple. You're less likely to see those complicated structures."

Still, in the wake of Enron Corp., Mr. Wiener said, agency accountants and auditors will be more vigilant.

A common agency accounting issue during the past year was widespread use of non-recurring charges to earnings, allowing a company to break out expenses for unusual items.

Wall Street analysts became increasingly wary in 2001 when several holding companies took charges to earnings for multiple waves of layoffs as the economy tanked.

Those charges are hard to justify when salary expenses are the largest portion of agencies' normal operating costs and companies take several charges in one year, said Michael Russell, advertising analyst at Morgan Stanley.

A non-recurring charge allows the company to take care of those large expenses and explain them to Wall Street, and then have a cleaner balance sheet going forward, Mr. Wiener explained. But as the name implies, non-recurring charges are not supposed to be repeated.

"If your partner takes you out to dinner every night with flowers and candy, Valentine's Day doesn't mean anything," said Mr. Wiener.

Non-recurring charges are a legitimate way to address large restructuring programs in this economic downturn, said Jacques Herail, chief financial officer of Havas Advertising. The French-based agency company took a charge last year to realign units acquired in its purchase of Snyder Communications.

In general, accounting rules limit the ability to "play with the numbers," said Havas' Mr. Herail. But he noted U.S. companies operate under different generally accepted accounting principles than British companies, which have different rules than the French.

As a general rule, accounting charges are not desirable, said Lauren Rich Fine, advertising analyst at Merrill Lynch & Co. "You never want to see a company take charges," she said, "because it's an admission that things are not what they seem."

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