Federal rules require contractors to have accounting systems that comply with government standards. In awarding the White House Office of National Drug Control Policy's account in 1999, the government failed to catch that Ogilvy's accounting systems didn't meet the specification.
$1.7 million fee
Drug office personnel, impressed with the agency's strategic plan, awarded a one-year contract renewable for up to five years. Ogilvy gets a $1.7 million annual fee plus labor and expenses.
WPP Group's Ogilvy quickly got into a dispute over billing matters. That evolved into a civil and criminal investigation, as the drug office considers whether to continue the contract into a fourth year or rebid the contract; a decision is imminent.
Ogilvy plans and buys media for the $160 million annual campaign and negotiates free matching ads of similar value for each paid ad bought. It does little creative: Most ads come from the Partnership for a Drug-Free America.
Ogilvy finally got its accounting systems certified last month -- more than two years after winning the contract, and after more than two years of wrangling over billings.
Case of fraud?
Billing issues may have been partly due to bureaucratic infighting, legitimate questions about Ogilvy's billing and documentation and the normal differences between contractor and government over how expenses should be treated. But the possibility has been raised by two congressmen and some U.S. General Accounting Office officials that fraud may have come into play as Ogilvy pushed to increase profit on the contract.
Ogilvy brought reports of billings problems to the Justice Department's attention last year after the General Accounting Office began an investigation.
"When we recognized that there were concerns with the billing process, we went immediately to the Department of Justice," said Ogilvy spokesman Paul Clark. "Throughout that process [of resolving issues] we have been working with all the federal agencies. We hope it will be resolved soon and we can go on with the contract."
The brouhaha has had little to do with the quality of Ogilvy's work, which has won praise.
"I felt sorry for them because I know them to be an honorable agency," said Doug Laughlin, president of Laughlin, Marinaccio & Owens Advertising, an Arlington, Va., agency that has handled government contracts for more than 30 years. "There are difficulties dealing with the government. You have to realize going in it's like dealing first with a company's marketing director and then with a company's comptroller."
In early 1999, a drug office official began questioning some of Ogilvy's bills. The Department of Health and Human Services, which at the time administered Ogilvy's ad contract, had said the shop's accounting system met government standards. A drug office official, however, found that Ogilvy did not. Bills didn't include needed documentation; accounting for bonuses and raises didn't meet government standards; and there were issues with vacation and days off. It eventually became apparent the government hadn't done a required prebidding check of Ogilvy's accounting system.
The official, Richard Pleffner, the drug office's contracting officer, who refused to pay $7.6 million of Ogilvy's first bills, notified the GAO and the controversy was born. It didn't help Ogilvy that its own accounting system revamp, combined with the drug office decision to replace Health and Human Services as contract administrator, delayed an audit to resolve the disputed amount.
The government wasn't out money, and Ogilvy withheld billing for millions more until its accounting system was properly certified. But disclosure of the problem started the probe that led to questions on Ogilvy's timesheets for government work, accusations of fraud and Ogilvy's acknowledgment that it couldn't adequately support $850,000 of labor costs, some of which had already been paid.
The prolonged billing issue also attracted attention of congressmen. Last year it was U.S. Rep. John Mica, R.-Fla.; this year, it was Rep. Bob Barr, R.-Ga.. They in turn prompted embarrassing congressional hearings.
Barry McCaffrey, the retired general who ran the drug office during the Clinton administration, has tangled with both congressmen before over their criticism of the drug office.
"He is a pit bull," said Gen. McCaffrey of Rep. Barr. "My guess is he's grabbing at this to show he is vigorously defending the taxpayer."
Gen. McCaffrey defends Ogilvy. "I have no reason to believe that this firm had anything but the highest integrity. ... It's hard to believe that there was fraudulent behavior by the senior leadership of the agency. It's a far leap from aggressive billing to criminal behavior."
Ogilvy's problems have been a lesson to others with new government contracts. Bcom3 Group's Leo Burnett USA, Chicago, which won its first government contract, the U.S. Army, this year, worked to resolve accounting issues early. Doug Smith, vice president-account director on the business at Burnett, said the firm worked to create a dialogue with the Army on accounting and marketing issues.
Mr. Laughlin said the Ogilvy issues show all too well the problems of government ad contracts. "The basics are the same, but the federal acquisition regulations are voluminous and ... you have to be very careful from the get-go, because once you get involved, it is like entering a briar patch."