How you can guard against ad fraud

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Ferreting out ad fraud is difficult, say experts, because those engaged in it go to great lengths to cover it up. What's more, the amounts involved-$2,000 here, $5,000 there-are small in comparison to the millions spent on a particular campaign. But agency management, advertisers and auditors all agree that criminal behavior, no matter how minor, should not be tolerated.

"If and when it is discovered, it undermines the client-agency relationship," said Arthur Anderson, partner in consultancy Morgan Anderson.

The dilemma for agencies and clients alike is, where to begin? One of the most basic aspects of every assignment is keeping track of hours worked. Some software eliminates estimated time sheets and hassles of re-entering hours worked into a database by recording activity on particular programs and feeding that data into a main database. Stefani McClure, desktop-production manager at Interpublic Group of Cos.' McCann-Erickson, New York, opted to use a program from Gluon called JobTracker "because we wanted to cut down on time we spend re-entering hours into our billing system" and increase accuracy, she said. "Ultimately we can use it as a productivity measure."

One of the best ways to encourage good behavior from both agency and advertiser is for the client to make clear to the agency that the client may conduct an audit at any point. But auditing an agency requires more than just matching invoice to check received.

David Brocklehurst, a former Ogilvy & Mather Worldwide financial executive who now heads FirmDecisions, a global consulting network that performs agency audits for advertisers, has uncovered a variety of scams in the auditing process. For example, a supplier may offer a credit off an end-of-the month statement. That way, if an auditor checks the actual invoices against what was billed to the client, the invoices will match. An auditor would need to be aware that credits may have been issued and not allocated to the client's job nor passed onto the client.

More common than outright scams, say experts, are areas that simply are not discussed by agency and client. Discounts, according to Mr. Brocklehurst, come in many forms, including preferred-supplier discounts, volume discounts in media and production, and early payment discounts. Most agencies argue that these discounts are theirs, not the client's, because no one client's volume on its own has earned the discount.

Auditors agree that when a particular supplier is chosen frequently, it is wise to investigate the terms of the relationship between agency and vendor. To make sure fees are fair, clients should ask third-party vendors "to offer set prices up front, including artists' time and other labor costs," suggested Ed Weinstock, president, Fuel Digital, a provider of digital retouching and photography and pre-press services. Then, clients should approve every alteration during the production process so they understand how the total charge is calculated.

Another area, said Mr. Brocklehurst, is the nature of third parties. "Many agencies have created and used subsidiaries that they treat as if they were third parties. This allows agencies to earn income on the same service twice," he said.

Agencies can build other safeguards. Victor Basile, senior VP-director of print and graphic services at Bcom3 Group's D'Arcy, Masius, Benton & Bowles in New York, recommends that agencies regularly rotate buying responsibilities on each account. "That way, if there's an arrangement with a particular piece of business," the connection cannot be maintained, he said. Mr. Basile in January took over as head of the American Association of Advertising Agencies' print-management committee-replacing Mitchell Mosallem, the former exec VP-director of graphic services at Grey Global Group's Grey Worldwide who was indicted last month on charges of bid rigging.

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