THE COMING CHANGES IN AD AGENCY ACCOUNTING

New PCAOB Chief Wants More Accurate Disclosure of Ad Spending

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NEW YORK (AdAge.com) -- Douglas Carmichael, the new auditor for the accounting profession, wants to see better disclosure of corporate America's ad spending, including an end to the practice employed at some companies of using estimated rather than actual ad expenses in calculating quarterly earnings.

Mr. Carmichael, a frequent critic of lax accounting, starts in May as chief auditor of the new Public Company Accounting Oversight Board. "We want to set standards that are in the public interest," he said, in defining his overriding goal. "We want to make it clear that the auditor's role is to protect the investor, that the investor is the primary stakeholder."

Activist auditor
Appointment of the activist auditor is getting good reaction from shareholder proponents. "I am glad to have an avowed representative of shareholder interests at the [oversight board]," said Nell Minow, co-founder of The Corporate Library, a research center focused on corporate governance. The accounting industry's reaction is more muted.

"The appointment of Doug Carmichael is a step forward," said a spokesman for the American Institute of Certified Public Accountants, which has lost significant industry oversight responsibilities to the board.

Congress created the board last year as part of the Sarbanes-Oxley Act, which tightened corporate governance in the wake of financial and accounting failures at Enron and elsewhere. The board will oversee audits of public companies' financial statements, set auditing standards and regulate and discipline accountants. Mr. Carmichael, 61, an accounting professor at New York's Baruch College and director of its Center for Financial Integrity, is taking a leave to accept the new post.

Advertising issues
Among advertising accounting issues, Mr. Carmichael said there needs to be better disclosure of vendor rebates in advertising allowances that retailers get from suppliers. "The accounting standards in that area could be tighter," he said. Regulators are investigating how supermarket giant Ahold accounted for promotional allowances at its food-service unit.

Mr. Carmichael would like to end the practice used by some household and personal products marketers, such as Gillette Co., Colgate-Palmolive Co. and Kimberly-Clark Corp., of estimating quarterly advertising outlays in the first three quarters of the fiscal year before reporting actual spending in the year-end report.

Disclosing quarterly ad spending
A 1993 regulation requires companies to disclose actual ad expenses annually, but a 1970s rule still allows them to estimate the expense each quarter, which Mr. Carmichael said leaves open the possibility a company could manipulate the expense line to smooth quarterly earnings. While fixing the quarterly ad expense issue is not a high priority, "it's a good example" of longer-term issues that should be addressed, he said.

Mr. Carmichael is no fan of advertising done by the accounting firms he now gets to regulate. "The importance of advertising in the economy was to get your real message across, not to fool people," he said, noting that the messages in some ads run counter to the profession's recent missteps and efforts by some to fight new industry regulation.

Accounting firms, he said, may "talk the talk, but they don't walk the walk. Many firms are saying the right thing in their ads, but I haven't seen the follow-through in [that] they're actually doing it."

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