Dentsu Inc will pay back JPY230 million (A$3 million) to clients after an internal investigation revealed it overcharged 111 clients in 633 "suspicious transactions", Japan's largest advertising agency revealed overnight.
In an official statement first shared with Campaign Asia, Dentsu's chief executive Tadashi Ishii revealed the scale of the overcharging scandal, that was first questioned key client Toyota - as revealed by AdNews.
It relates to digital advertising, including performance-based marketing from its subsidiary DA Search and Link, as first revealed by AdNews this week.
The problems include discrepancies of advertising placement periods that may or may not be intentional, failure of placement, and false reporting regarding performance results or achievements. It also includes incidents where "invoices did not reflect actual results, resulting in unjust overcharged billing".
"As to the scale of transactions that might have been conducted inappropriately, the following outlines the specifics thereof, which we have confirmed as of September 22: there are 633 suspicious transactions and the number of advertisers concerned is 111; the transactions corresponding to inappropriate operations amount to approximately JPY 230 million (US$ 2.28 million)," the statement said. Read the full note below.
Dentsu's internal probe began in August and covers a period of billing from November 2012.
To rectify the situation, Dentsu has placed responsibility of digital advertising to a separate and independent division within its group, placing serious doubts over the future of DA Search and Link.
Dentsu has also carefully stressed the incidents are purely a Japanese problem and do not extend to other arms of the business.
Although the monetary amounts overcharged are not substantial, the damage to Dentsu's reputation in a market where business relations lean heavily on trust is hard to quantify at this early stage.
In the wake of the scandal breaking on Tuesday, Dentsu’s shares fell 4.8% percent to JPY5,170 (A$67.2) and its market valuation has fallen by 23% this year, more than the average 12% slide among the 225 largest listed companies on the Nikkei stock exchange.
Dentsu says the saga will not materially affect its business results and it would inform the market if this position changed.
In the year to year to 31 December 2015, the Dentsu Group reported global revenue growth of 12.8% to JPY818.6 billion (A$10.2 billion). About 49% of this stems from Japan, where Dentsu claims to control about 25% of ad spend in the country.
Dentsu is the most powerful media company in Japan and exerts an unusual amount of control over the media. Not only is it the largest advertising and media agency, it is also a media owner, a sports rights owner and broadcaster, and owns a stake in the official television ratings company.
Dentsu's relations with long-standing clients are so enduring, as one expert tells AdNews, it may be able to contain the issue.
Although this is a Japanese issue, it will surely lead to a period of soul-searching for the media industry in Asia. An ANA report released earlier this year found media is "conflicted, non-transparent and disconnected", but such problems are previously thought to be predominantly an issue in the West.
In the media, there is a broad level of opaqueness around digital media and particularly programmatic trading where clients can be unaware (and sometimes unconcerned) about the margins media agencies make. This practice is not illegal in Australia provided that it is clearly disclosed in agency-client contracts.
But to blame media agencies alone for the problem is misguided. It is an ecosystem whereby marketing spend is increasingly screwed down by procurement-led pitches for business and agencies are forced to find creative ways to build value for themselves into the system.
The Dentsu overcharging scandal may expose problems in Japan, but it also highlights that this is broader global issue that can happen anywhere when media buying is treated purely as a commodity with very little oversight around trading.
It's an issue the Australian market is all too familiar with, following the 2014 misreporting scandal that enveloped MediaCom
Dentsu CEO Tadashi Ishii's statement in full:
"This is an issue confined to Dentsu in Japan. We are taking this matter extremely seriously and investigating the issue to fully understand the facts. All clients who may have been impacted have been communicated with already.
In relation to a part of our digital advertising services for advertisers (including performance-based digital advertising services) provided by our company and some of our group companies in Japan, it has been found that there were multiple incidents where services were provided inappropriately.
Types of irregularities involving inappropriate operations which we have detected to date include discrepancies in advertising placement periods either made consciously or by human error, failure of placement, and false reporting regarding performance results or achievements.
Additionally, it has been detected that there were incidents where our invoices did not reflect actual results, resulting in unjust overcharged billing. We take this matter seriously and immediately after finding out about the incidents, we organised an internal investigation team in the middle of August.
We have initiated extensive investigations to grasp and verify the actual situations, including the root causes leading to the inappropriate operations, and we are vigorously continuing our investigations. More specifically, our investigations cover those digital advertising services rendered after November 2012 to date in Japan, during which time period billing data and other relevant data, which would be required to grasp the actual situations and for clarifying the root causes leading to the inappropriate operations, have been saved.
We have been pursuing investigations through verifying and comparing various data and documents, conducting interviews of employees who were involved in the operations, verifying business flows related to the digital advertising services, and employing other feasible means.
For those transactions which we have found in the course of our investigations that might have been conducted inappropriately, irrespective of the details thereof, we have reported to the advertisers concerned the factual backgrounds which we have found to date.
We also have reported to relevant associations and organisations the aforesaid situations. While we are still in the process of pursuing our investigations, if we confirm new facts, we will deal with such new findings in the same manner.
As to the scale of transactions that might have been conducted inappropriately, the following outlines the specifics thereof, which we have confirmed as of September 22: there are 633 suspicious transactions and the number of advertisers concerned is 111; the transactions corresponding to inappropriate operations amount to approximately JPY 230 million (US$ 2.28 million).
Among those transactions, the number of cases where fees were charged while no placement had been made was found to be around 14.
As an interim measure, in order to ensure that human errors or inappropriate operations in digital advertising will be prevented and detected, in early September we transferred operations to verify the specifics of advertising placements, publications and billing to a separate section which is independent from the section previously responsible for such operations, and we have endeavored to strengthen our business system for such verifying operations.
Our company is determined to clarify the causes leading to the impropriate operations and to establish further requisite measures for resolving the situations and fundamental preventive measures, and to implement such steps faithfully and steadily in order to restore confidence in our company.
Following the taking of such steps, we plan to report the progress of our efforts to our clients and business partners including advertisers, related associations and organizations and all other stakeholders.
At this stage, we are aiming at doing so by the end of this year. We sincerely apologize to our esteemed advertisers, the parties concerned and our shareholders from the bottom of our hearts for causing concern and trouble.
At this moment, we do not believe that our business results would be materially affected. However, if we find any new matter which would materially affect our business results in the future, we will disclose such new matter promptly, as soon as it comes to our attention."
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