GroupM reveals findings of MediaCom audit: outlines overhaul of processes

Rosie Baker
By Rosie Baker | 9 March 2015

GroupM has revealed the findings of the independent Ernst & Young (EY) review into MediaCom, unearthing discrepancies on three additional client accounts, sitting alongside Foxtel, Yum! Brands and IAG. It's been found that procedures were not robust enough and now MediaCom has outlined a raft of measures it will put in place as it bids to move past the scandal that has enveloped it for the past three months. Media buyers will face more checks and balances as the company now plans to improve its processes and rebuild its reputation.

Below we outline the findings of the audit, the recommendations made by EY and the actions GroupM is taking.

On the completion of the review, GroupM chairman John Steedman told AdNews: “Throughout this entire process, and as an organisation all the time, and me personally, we’ve operated in an ethical, honest, transparent and open manner with clients and staff. Myself and Mark [Pejic] and various others within our organisation have been devastated by what’s happened.

“In my 40 years in this business I have never encountered anything of this magnitude and frankly, it terrified the crap out of me and everyone else in the organisation. But we’ve addressed it in a way that we believe is appropriate, and importantly we have addressed it in a way that has been transparent to our people, to our clients and to the media.”

After the news broke in December of a raft of staff exits over irregularities on account reporting, GroupM and MediaCom went silent on the issue, pending the results of the review. The process took longer than expected – something that Steedman believes shows “the depth of the process”.

In total, 12 people have left MediaCom as a result – some dismissed and some by choice, but there are no further exits planned. Mutterings in the market have questioned whether a senior figure within GroupM or MediaCom should take the fall and be held responsible and there have been some suggestions that as the head of the agency, Mark Pejic’s role going forward would be in question.

Steedman told AdNews that as the leader of GroupM, he takes full responsibility, and gave his full support to Pejic.
“[Global and regional management] have implicit trust in me – it’s unfortunate that this has happened under my watch but we as a group have approached this in an very open manner with our clients to address the issue. Mark [Pejic] has my full support and the support of MediaCom and GroupM regionally and globally.

“Importantly, as a business we are looking forward and not behind us – as a business we are now the most scrutinised agency in our industry we have client auditors in here all the time, our own WPP auditors, SOX auditors all the time – it’s an ongoing trail of auditors to make sure we are compliant.

GroupM declined to comment on the cost of the entire process, from the cost of the EY audit, Foxtel’s PwC audit, which GroupM is understood to have shouldered the cost of, and the compensation and returned fees to clients, let alone the cost of lost business in the Foxtel account, and the potential loss of one other account. Steedman declined to comment on suggestions of the cost, saying only that it was “significant” but it is understood to be in the high hundreds of thousands of dollars.

Steedman and Pejic, despite the “devastating” impact of the last few months on the business, are optimistic that MediaCom will come out the other side in a stronger position.

Pejic, CEO of MediaCom, said: “Whilst this has been a shocking and difficult time for us, for John and me particularly … what we have done is be very honest, and not try to do it the easy way. We went to significant expense, a number of different layers – and that stands us in good stead, because we will continue to walk that talk. We have to regain the trust of our clients – we’ve got to do that ongoing.”

The findings of the MediaCom Australia audit come as a former MediaCom CEO in the US slams the industry for “widespread” rebates and kickbacks, as reported by Advertising Age. Jon Mandel, spoke out savagely about the practices, on stage at the Association of National Advertisers Media Leadership Conference on Thursday in Hollywood – despite not having been an agency CEO since 2006.

In response to the article, John Steedman told AdNews that he could not comment on the US business but that “GroupM does not accept rebates in Australia.”

In the US, Rob Norman, chief digital officer at GroupM, also refuted the claims telling AdAge: "GroupM and its agencies have not sought nor received any rebates from US media vendors or other parties with whom we do business on behalf of our clients. In other markets around the world, rebates are sometimes part of the buy-sell relationship between agency and vendor. GroupM returns those rebates to advertisers in compliance with and as required by our client contracts.”

Steedman continued: “[These are] obviously very challenging times … we’ve tackled it the hard way but taken it head on and done it the right way we believe. We’re moving on with humility and a real desire to execute all of these changes as quickly as we can … we know that [long term] it will benefit all our clients and our teams going forward. We now need to focus on implementing everything, and we’re looking forward to a very bright future as a business.”

Below, we outline the scope of the audit, its findings, the recommendations EY put forward, and how GroupM plans to implement those across MediaCom and Mindshare, MEC and Maxus.

The scope of the audit:
Ernst & Young (EY) had a team of 12 auditors within GroupM, although it's understood that at points there were up to 40 auditors in the business, including Foxtel’s PwC auditors and GroupM’s internal regional teams.

The work carried out by EY over an eight-week period was an investigation into allegations of manipulation of post campaign TV performance reporting and an interrogation of the ‘book-bill-pay cycle – in other words, what the media owners charge the agency and what the agency charges the client.

EY looked at 45 campaigns across 19 client accounts from MEC, Maxus and Mindshare with a “heavy emphasis” on MediaCom, going back two years.

To identify which accounts to investigate, EY looked at the top 25% of clients across each agency by billings and then selected a sample from within that. The sample was selected by EY and not GroupM or MediaCom, and included clients that had formerly requested the EY formality.

EY looked at more than 8000 documents and carried out independent face to face interviews with 30 employees, and interviewed many more employees and former employees in “walkthrough” sessions held to understand the processes across the agencies.

Beyond the EY investigation, MediaCom also carried out more than 60 three-step spot check reviews on client accounts and campaigns. Clients saw a raw data file from BMD software, their media plan and their signed media booking authority (MBA) and matched the performance with the raw data. No discrepancies were found and those clients, said Pejic, were satisfied and did not “feel the need for further verification” with a formal EY investigation.

Alongside the EY review, GroupM’s regional risk management team carried out a parallel review as did Foxtel, carried out by PwC.
GroupM’s Singapore-based risk management review looked at the processes and contracts in place around controls, and the circumstances surrounding the misreporting. The regional team then worked with local GroupM management to enhance current processes and controls.

The findings:
EY identified irregularities on a number of client accounts including and in addition to the three identified – Foxtel, Yum! and IAG.

It confirmed the allegations of manual manipulation of post-campaign analysis reports for TV buys that had already been identified on Yum! Brands and IAG. (At this stage Foxtel’s business was ebbing investigated separately by PwC and so was not in the scope). That report is also now complete. GroupM had no comment to make on it beyond “we agreed with its findings”. Ed Smith, Foxtel marketing director, was unavailable for comment.

Additionally, EY found three further client accounts with discrepancies – but would not reveal which clients. These three clients’ accounts were found to be “outside of GroupM’s accuracy threshold” defined to be +/- 10 percentage points.

These inaccuracies were found to be down to mistakes or changes to plans rather than the intentional manipulation of reporting. Reasons range from bookings being moved from one product to another, a run on a different demographic, or the timing of the run being different.

EY identifies these discrepancies to be “rational or accidental” and not the result of malpractice or intentional manipulation. GroupM says the clients have all been informed and “accept the explanations”.

Suggestions over “overcharging” clients were found to be unfounded, said Pejic.

The recommendations:
The recommendations put forward by EY fall into four action plans – all of which bar one, are to be implemented by GroupM in the next 12 weeks. Those categories are:
1: Establish an Australian compliance team within GroupM
2: Contractual agreements and MBAs
3: Systems and process enhancement
4: EY & internal reviews.

The actions:
Australian Compliance Team

GroupM will set up a three-person compliance team across the Australian business – it will report to GroupM chief investment and intelligence officer Danny Bass.

The team will be responsible for delivering the EY recommendations, ongoing TV performance reporting on campaign cost, TARP/audience and reach.

It will also carry out random spot checks. Each media buyer across GroupM will be subject to a number of audits per quarter, with campaigns chosen at random and all supporting material required for review. The results of spot checks will be disclosed to agency trading bosses, CEO and CFO and the client.

Bass was not available for comment on how the compliance team would operate or be managed.

As to why GroupM didn’t already have a compliance team in place, Steedman said: “In any organisation there’s a level of trust you put in place with your employees, and obviously as I said, that trust was abused, and as a consequence of that trust being broken, we’ve had to put in foolproof systems to ensure that hopefully this never happens again.”

Contractual agreements and MBA:
One of the findings of the EY audit said Tony Prior, EY director of fraud investigation and despute services, was that document controls were not “robust” enough.

“[There were] three things we saw. [Firstly] was that it’s a very dynamic environment and the pace of change is quite quick in terms of instructions from clients. Secondly, the medium and channels of communication from clients was quite informal – right down to SMS or phone call. Thirdly, the ability to lock down individual reports so they couldn’t be altered. So one of the things that came out was around making sure that communication between clients and the networks was in a more robust form,” he said.

GroupM will now put in place a process that requires written, formal agreement between all parties identifying discounts. These will all be stored in a centralised server only accessible by senior management and the compliance team. If buyers need to access the files – approval of the agency head will be required.

Pejic said: “The pace of change in the business is such that there are multiple changes from any campaign but when you look at it from a puritanical point of view – the MBA should always match the final plan. [The new process] means there is no discrepancy or allowance for any differences between the beliefs of the agency and its clients when it comes to transactions.

“Some clients would approve by SMS, some verbally – we want to endure that as part of our quest to become the tightest unit with regard to compliance that we leave no gaps in the process – and this is an opportunity for the gap to be closed down as regards to MBA … to be frank I think our people just need to get stricter with clients around MBA and when that becomes an establishes practice it shouldn’t take more time.”

Systems and process enhancement:
Post analysis reports will also now be converted into PDFs, instead of held in a software system, that could be accessed. These too will be stored in a centralised server accessible to the compliance team and senior management only. This went into place on 28 February.

GroupM is also implementing new BMD software that improves the tracking of planned booked and actual budgets and goals through automated processes’ and will allow no manipulation of actual results. It will be in place by October 2015.
All GroupM staff will be trained on the new Campaign Management Software, and compliance training will be rolled out for new starters and refreshers for existing staff.

Pejic said: “You know with agencies there is a fair amount of churn, and what we want to make sure is that anyone that is employed by GroupM completely knows and understands all of our compliance regulation processes.”

External and internal reviews:
EY will also return in six months to investigate the implementation of the recommendations, and provide the Singapore team with an analysis of progress.

Steedman would not comment on any knock on impact for the industry and its reputation, however the Media Federation of Australia (MFA), which has not yet publicly commented on the GroupM audit, or its impact on the reputation of the industry, today welcomed the findings of the report.

MFA CEO Sophie Madden said: “We applaud GroupM for taking the necessary steps to address the issues identified at MediaCom, in order to reflect the MFA codes of behaviour. Our Code [of behaviour] requires our members to act professionally, honestly and to always provide clients with advice that serves their best interests.

“The transparency of the independent review process initiated by GroupM was fully supported by the industry. The reputation and integrity of the media buying industry as a whole is shaped by individual actions of all of our member businesses, regardless of size or market share. GroupM Took the responsible and necessary approach of engaging external audit specialists to examine client account issues that were brought to its attention.”

UPDATE: The AANA has published a response to the audit findings.

Sunita Gloster, CEO of the AANA, said: "The AANA represents the interests of Australia’s leading brand owners and advertisers. Our members fully realise that the new technologies now at play have fundamentally changed how media is bought, and the value and profit equations for all parties involved. They are active in seeking the requisite transparency necessary to negotiate contracts that are fair to both parties and those are obviously confidential discussions to which the AANA is not party.

"What all our members say to me is that media buying is a highly competitive industry and they will regularly test the market to ensure they are getting best practice transparency, service and value. It is also worthwhile remembering these issues are not peculiar to Australia, they are global. The AANA through its involvement in the World Federation of Advertisers has access to best practice guidelines on obtaining transparency and return of media income which provide practical checklists of areas to assist our members to navigate this space with more expertise."

This article is one of a series of articles looking at the GroupM MediaCom audit. Read the rest below:
GroupM reveals findings of MediaCom audit: outlines overhaul of processes
MediaCom admits misuse of value banks – pledges no more
MediaCom faces losing at least one major client
Q&A: Yum! Brands on MediaCom - ‘As clients we’ve got to be fair
Timeline: MediaCom’s audit process

 

Recap the MediaCom story from last year:
MediaCom exits linked to Foxtel and KFC overcharging
Foxtel moves account from MediaCom to MindshareRogue traders: how MediaCom’s dynamite exploded MediaCom: What now - will a raft of agency audits kick off?
The media's responsibility around MediaCom

Have something to say on this? Share your views in the comments section below. Or if you have a news story or tip-off, drop me a line at rosiebaker@yaffa.com.au

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