McCann's parent, Interpublic Group of Cos., restated $364 million of earnings for the 1996-2002 period, and is the subject of a U.S. Securities and Exchange Commission investigation. Up to $120 million of this sum is under investigation in London. The debacle cost several senior McCann executives their jobs.
Interpublic says it learned of the problem last summer. However, McCann Europe's former financial controller, John Sullivan, alleges in a lawsuit that he had raised the matter more than a year before that. Sullivan, claiming he was wrongly accused of gross misconduct, says he is being scapegoated as a "whistleblower." There is neither the space nor intention to explore that matter here, but it throws up an issue of longer-term significance.
Inter-office billings are a big problem in all major agency networks. It's been exacerbated by the long trend of client centralization, usually through a big agency network office in, say, London or Paris. This potential billings boon to a network causes a billing nightmare for its internal accounting procedure as local offices scrap over exactly what they are owed through inter-office reconciliation.
Then there's a cultural issue. Networks like to consider themselves machines, McCann famously so. Local offices must contribute a profit to the greater good. Under public ownership, this pressure to hit targets has increased. Managers are fired for not delivering. So the little favors country managers would once do for each other now get billed and recorded as income. However, reconciling the demand for a payment with actual money paid is another matter altogether. The network CEOs to whom I have spoken about this nod their heads in resigned recognition of the scenario.
How do agencies stop this from happening again? This is not a problem arising from integration of services, but from geography. There is talk of a return to country silos, with local managers taking greater individual responsibility back from the regional executives. The advantage and disadvantage of this is that it puts a greater stress on the individual executive in Lithuania or, indeed, in London to be trustworthy.
This scenario appears unworkable. A more likely solution is the introduction of internal accounting and legal executives to constantly review the process. These can only succeed if they are independent of the finance group or, more importantly, are not given incentives to deliver more positive numbers.
The real answer lies in the culture, and the key is the pressured local manager, who somehow must create growth out of budget cuts and a dearth of new business opportunities. To prevent the accounting irregularities, stop bullying that individual executive for growth. In a public company, however, it appears that is easier said than done.
Stefano Hatfield is contributing editor to Advertising Age and Creativity.