IPG Offers Details Behind $550 Million Restatement

'Material Weakness' in Agency Oversight Cited

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LOS ANGELES (AdAge.com) -- Included in Interpublic Group of Cos.' $550 million restatement for 2000-04 was $108 million in adjustments to net income to correct "errors" uncovered through internal investigations by management, forensic accountants and lawyers.

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Interpublic made the disclosures Sept. 30 when it released a long-anticipated restatement of financial results for the four-year period. The restatement followed a detailed review of the holding company's books and came more than three years after Interpublic first disclosed in August 2002 that it had found discrepancies in its accounting.

'Deliberate falsification'
"Certain of these investigations revealed 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," Interpublic said in its Sept. 30 10-K annual report, which offered details on earlier disclosure of "malfeasance."

"These errors were not prevented or detected earlier because of material weaknesses in our control environment and decentralized operating structure," Interpublic said. "In a number of these cases, the activities appear to have had the purpose of improving the reported financial performance of the operating unit involved. In a number of cases, we believe the purpose included reducing the personal tax burdens of the individuals involved.

Cases of misconduct
"If we conclude that there has been misconduct" in a given case, the company said, "we take appropriate personnel action, which may include termination, and if recommended by counsel, we notify the appropriate governmental and regulatory authorities of violations of law, and take legal action if appropriate to recover our losses."

Seven cases accounted for about 80% of the adjustments; six were in Europe, and one -- at Media First in New York -- was in the U.S.

The following is a list of cases uncovered in Interpublic investigations that resulted in restatements of more than $5 million:

MCCANN ERICKSON
Agency: McCann Erickson in Turkey
Cost: $31.8 million reduction in net income for 2000-04
Problem: "Retention of vendor discounts that should have been remitted to clients, the improper valuation of a previously acquired business and over-billing clients for payments to vendors."
Action: "Our information to date indicates that these activities involved misconduct by local senior management. When the investigation is concluded, we will determine the appropriate personnel actions, which could include terminations of local senior management."

Agency: McCann Erickson in Greece
Cost: $12.7 million reduction in net income for 2000-04
Problem: "Errors are attributable primarily to retention of vendor discounts in excess of the level permitted under Greek law and the purchase of prepaid media on a speculative basis without the appropriate client commitment. In addition, we identified inappropriate related-party transactions and evidence of improper gifts."
Action: "The senior officer and other management personnel at the agency have been terminated and parts of the agency's business have been divested."

Agency: McCann Erickson in the Netherlands
Cost: $7.2 million reduction in net income for 2000-2004
Problem: "Errors are attributable to the recognition as revenue of certain discounts and benefits that should have been returned to clients or vendors."
Action: "We have terminated and/or replaced local financial and operating management."

Agency: McCann Erickson in Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan.
Cost: $8.6 million reduction in net income for 2000-04
Problem: "Errors were attributable to failure to record and pay compensation-related taxes, value added taxes and corporate income taxes, and to inadequate record keeping. Management in these jurisdictions paid certain employees as contractors, often in cash, without accounting for the payments. In three of these countries, income and expenses were recorded by a service company located outside these jurisdictions to avoid corporate tax or value added tax."
Action: "We have sold or are in the process of selling all of these entities. In the case of the Ukraine, we plan on signing an affiliation agreement with the management there with appropriate controls in place to assure our business is properly conducted."

FOOTE CONE & BELDING
Agency: Foote Cone & Belding in Turkey
Cost: $14.5 million reduction in net income for 2000-04
Problem: "Errors were attributable primarily to inappropriate charges to customers and evasion of local taxes. Our information to date indicates that these activities involved misconduct by local senior management."
Action: "When the investigation is concluded, we will determine the appropriate personnel actions, which could include terminations of local senior management."

Agency: Foote Cone & Belding in Spain
Cost: $10.5 million reduction in net income for 2000-04
Problem: "Errors are attributable to the use of companies that were formed to account for the production and media volume discounts received from production suppliers on a separate set of books and records. As a result, discounts and rebates to which clients may have been entitled under local law were concealed to prevent detection in the event of a client audit. In addition, compensation was paid to an agency executive's personal service company out of these companies without proper withholding for income taxes. At the same location, we have also recorded adjustments with a cumulative impact of $4.2 (million). These errors are attributable to the inappropriate recognition of certain discounts and benefits that should have been remitted to clients."
Action: "We plan to divest our interest in FCB Spain and sign an affiliation agreement with the management there with an appropriate control structure to assure future business is properly conducted."

MEDIA FIRST
Agency: Media First, New York
Cost: $10.8 million reduction in net income for 2000-04
Problem: "Errors are attributable primarily to inadequate recordkeeping but also included payment of certain employee salaries through accounts payable and without appropriate tax withholdings. The errors resulted in increased earn-out payments."
Action: "Some management personnel at the agency involved in this activity have been terminated."

VARIOUS AGENCIES
Agency: Various
Cost: $11.9 million reduction in net income for 2000-04
Problem: "Other investigations that had an impact of less than $5 (million) each have resulted in adjustments with a cumulative impact on net income for the years 2000 through 2004 of $11.9 (million). The errors were similar in nature to those described above."
Action: "We have terminated, or are in the process of terminating, the employees involved in these occurrences."

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