The Justice Department's ongoing investigation of print production-and its indictment last month of Messrs. Mosallem and Ergulec and two print-production sales reps (AA, May 20)-has shed new light on the old issue of financial improprieties in advertising.
Compared to the money spent on U.S. advertising-$231.3 billion last year, according to Robert J. Coen, senior VP-director of forecasting at Interpublic Group of Cos.' Universal McCann-the amounts uncovered in ad-fraud investigations are an industry rounding error. Next to the big-time crime on Wall Street, theft on Madison Avenue is small change.
Kickbacks, payoffs and having fun on someone else's dime amount to advertising's dirty little secret-neither agencies nor clients have made rooting out the troubles a priority, a seamy fact of advertising that few in the industry want to discuss publicly.
The structure of the ad business gives opportunity to unscrupulous employees and vendors. Clients entrust their agencies with millions of dollars on a typical campaign, and agencies give employees broad discretion in selecting vendors and media. Taking an ad from idea to execution is an involved process of production, media and money flows (see "Follow the Money," P. 22). All that puts the onus on the agency to make sure its employees aren't cheating and on clients to make sure they watch how their money is spent.
up to clients
"It is important, when you have these issues, to be sure that [an agency's] internal audit department is strong," said Fred Meyer, a former chief financial officer of Omnicom Group and now a consultant to Omnicom President-CEO John Wren. "I don't think that the industry has a schlock reputation ... but I would imagine that more clients will want to ask how much is being paid to these pre-production outfits and maybe to other vendors."
Agencies and clients share a responsibility. Agencies must police and audit buying processes and vendor relationships, said Jeffrey Glasserow, president of GMA Group, an advertising-production consultancy. He notes clients often don't have people on staff with expertise in production billing.
Graham Phillips, former chairman-CEO of Ogilvy & Mather Worldwide and Y&R Advertising, said that for now, agency financial impropriety "is not a top of mind issue for clients" because so few occurrences have been uncovered. "If clients thought there was any risk that their money would be misappropriated, then they wouldn't turn it over to agencies," he said. "They would be very concerned."
Added Mr. Phillips: "I don't think the industry is in crisis, but agencies obviously have to pay attention. Agencies are money managers for their clients, and they do have a responsibility to make sure that they are fiscally responsible."
One of the complicating factors in detecting errors or fraud in an agency operation is that invoicing and payment terms can be different for each client. Some agencies issue an invoice for all estimated costs to the client as soon as the estimate has approval. Others spell out, in the agency/client contract, how the invoicing process will flow. Agency traffic and production employees must manage the process, often under tremendous time pressure. "I think it is hard for the senior management of an agency to recognize when fraud is going on because of that," said Graham Turpin, director of print services at Omnicom's Merkley Newman Harty & Partners, New York.
Most instances of billing problems in agency-client relationships, say experts, are the result of simple human error. "Only on rare occasions is there a devious scam or scheme operating inside an agency," said David Brocklehurst, a former Ogilvy & Mather financial executive who now heads Firm- Decisions, a global consulting network that performs agency audits for advertisers. "Many errors slip through in billings due to poor systems, lack of proper training or knowledge; miscommunication or lack of an agreement between the parties; and simple mistakes."
Agency partisans insist unethical and illegal behavior is the exception. "Almost everything works perfectly in the agency business" in terms of preventing misappropriation of money, said Bill Nicholson, exec VP-management services, American Association of Advertising Agencies. "I can say that with a totally straight face. But like in Enron, there are some people who do dumb things."
small time stealing
When fraud does occur, it can usually be discovered, Mr. Nicholson said. "The agency business is relatively simple," he said. "It is relatively easy to follow the cash. ... But if you steal a small amount of money in an environment where large amounts are being spent, it'll probably take a long time to find out."
The allegations against Mr. Mosallem, the former Grey production executive, and Mr. Ergulec, owner of Color Wheel, suggest that maintaining a successful scam requires, at the very least, careful attention to bookkeeping.
Federal authorities allege Messrs. Mosallem and Ergulec, respectively, instructed a Grey employee and a salesperson representing Color Wheel to track expenses so Color Wheel would know how much to pad bills to recoup the cost of perks provided to Mr. Mosallem and other Grey executives and to recover costs for Grey jobs that had gone over budget.
The alleged scam went on for about nine years. FBI agent Robert Silveri asserted in court papers that from February 1998 to July 2000 alone, the Color Wheel salesperson noted 127 monies-owed and 95 monies-added items. For that 30-month period, monies added totaled about $260,000.
"[Advertising production-related] fraud is never done on a huge scale," said Mr. Glasserow. "On a huge scale, you'd get caught quickly. Over a long period of time, though, small amounts add up." Authorities allege Mr. Mosallem had similar arrangements with at least one other owner of a graphics-supply company and two Grey employees.
Messrs. Mosallem, Ergulec, two print-production sales reps and Color Wheel pleaded not guilty last month to federal charges of mail fraud in connection with bid rigging. Grey is cooperating with federal authorities' investigation. The same investigation has implicated others, including the indictment of Lawrence Scaglione, a former purchasing agent at WPP Group's Brouillard Communications, on 17 counts of "conspiracy, commercial bribery, mail fraud and witness tampering as part of his receipt of kickbacks from graphics-services vendors." Mr. Scaglione on May 16 pleaded not guilty. Brouillard is cooperating with the investigation.
Under scrutiny currently because of the government probe, print production has long been dogged by innuendo as "dirty." Print production is a tight-knit service industry of small, generally privately held businesses competing for a limited base of customers. For unscrupulous buyers and sellers, opportunity exists in printing services for business to be granted based on kickbacks and perks.
But examples of such activity come from all areas of advertising, not just print production.
One of the more notorious advertising scandals in recent decades occurred in JWT Group's now-defunct TV syndication and spot-sales unit, which JWT shuttered in 1982 after it discovered the unit had booked $24.5 million in fictitious sales.
In another scandal, William B. Tanner, founder of an eponymously named barter and media-services company that later became Media General Broadcast Services, in 1985 pleaded guilty to charges of mail and income-tax fraud. A probe by federal authorities into Mr. Tanner's activities uncovered a long-running kickback scheme orchestrated by Mr. Tanner and several employees in exchange for business from clients such as Unilever's Thomas J. Lipton.
In a case involving an agency creative, John Bidus, a VP-creative supervisor at N.W. Ayer, in 1986 pleaded guilty to accepting $60,000 in kickbacks from agency suppliers. And Young & Rubicam in 1990 pleaded guilty and agreed to pay a $500,000 fine to settle charges that it had paid kickbacks to win and keep the Jamaica Tourism account.
Federal authorities, meanwhile, aren't through with the current probe of bid rigging, bribery, fraud and tax-related offenses in advertising, printing and graphics industries. The investigation is led by Ralph Giordano, chief of the New York office for the Justice Department's Antitrust Division. Mr. Giordano notes his office prosecuted the case leading to the December conviction of megamillionaire A. Alfred Taubman, ex-chairman of auction house Sotheby's Holdings, on charges of price fixing. Mr. Giordano is capable of taking down big game.