The Financial Times reports the sobering story of marketing and ad agency group Interpublic who, after over 400 acquisitions and global expansion, found itself having to restate its accounts for the past ten years and be the subject of an SEC investigation into its accounting practices:
[…] The company discovered “instances of deliberate falsification of accounting records, evasion of taxes in jurisdictions outside the United States, inappropriate charges to clients, diversion of corporate assets, non-compliance with local laws and regulations, and other improprieties.” In terms of their impact on Interpublic’s restatement, the biggest problems were in Turkey, where the company has said it might fire senior local managers at its McCann and FCB agencies.
And if that wasn’t enough:
A more subtle issue facing Interpublic involved legal local business practices. One such question turned on vendor discounts or credits – cash that agencies receive in return for buying large blocks of advertising time or space on behalf of clients. In Latin America, the Mediterranean and other regions, agencies often keep this money.
Interpublic’s problem was that this practice was difficult to reconcile with some of its global contracts with clients and with its obligations under US GAAP. It is clearly trying to make amends. Paying back this money accounts for most of the $250m that Interpublic has set aside to compensate hundreds of counterparties under the restatement.
[…] Advertising agencies face the risk that their more distant outposts will not produce enough revenue to justify the cost of compliance with Sarbanes-Oxley. This is a big issue for Interpublic. While discussing the earnings restatement, Interpublic executives said overall professional fees – mostly for compliance with Sarbanes-Oxley – represented 4.7 per cent of the company’s $2.9bn in first-half revenues. If that trend continues, and the company suggests that it will, Interpublic could end up spending an astonishing $300m this year on accountants, lawyers and other professional service providers. That compares with professional fees of $28.5m as recently as 2002.
The lengthy FT feature considers the role of Michael Roth, Interpublic’s chairman and CEO, and what he’s been doing to clean Interpublic’s house since he assumed the top job last January. The FT reports that Roth’s learning experiences include:
- Get accounting systems in place before you go global. Interpublic’s financial woes have been compounded by a failure to unify its operations’ IT systems.
- Beware of “local business practices”. Interpublic has found it hard to reconcile legal activities in foreign countries with the demands of US accounting standards.
- Think hard about Sarbanes-Oxley. Interpublic could spend as much as $300m this year on professional services. Not all foreign opportunities are worth the accounting costs.
- Follow the clients. More big corporations are giving global advertising assignments to streamlined networks. Marketing services holding companies should take note.
Blimey Neville – FT only just caught up with this? I did a dissection of Interpublic back in…err…May/June – the picture is much worse once you pull the accounts apart of its US parent and certain of it UK subs. This is a management that has repeated the same story (with slight variations) for three years, but has never taken responsibility for a failure to perform.
The Turkey thing seems dubious. Are they trying to convince us that lil’ol Turkey is largely responsible for fraud? Is that their excuse for poor management attention? What about the auditors in all this? If it is a one country affair it must have stuck out like a sore thumb.
But maybe not. They couldn’t verify sales. As a result they didn’t know for sure how much they are owed and all the while money was going out the business.
Sometimes, 20/20 hindsight gives a fuzzy picture. This one remains fuzzy…
Clearly I missed it in June, Dennis. The FT story appeared on October 10, a week ago.
You need to read the complete FT article to get the whole sense of how the FT has analyzed the issues at Interpublic. But I think the summary extracts I’ve included in my post do provide a good sense of those issues.
Plus, I was more interested in looking at lessons than furthering any debate on the rights or wrongs of what went on at Interpublic in previous years.
The full Financial Times article is reproduced in today’s (Wednesday, October 12) Financial Post section (page FP7) of the National Post (www.nationalpost.com). It is only available in the print edition.
It is worth noting that US GAAP applies “rules-based” accounting, whereas the GAAP and GAAS of many other countries is “principles based.” That is one of the challenges of a multi-national with offices in the USA and several other countries/and listed on American stock exchanges (and thus required to report according to SOX rules).
For the record, the International Accounting Standards Board (based in London, England) sets GAAP internationally. It is further along the principles-based continuum than US GAAP. The same could be said about international GAAS, which is set by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC).
One of the great benefits of this medium is the right of reply. This is a tale of how the FT’s reporting is less than incisive and, in my opinion, of dubious value.
Before scribbling this, I did a bit more fact checking to ensure I was correct. So…
The FT article said: “Mr Roth has been installed more recently to help resolve the mess.”
Interpublic’s website says: “He added the CEO title in January of 2005. Prior to becoming Chairman, in July 2004, Roth had been a member of Interpublic’s Board since 2002.”
The accounting mess really caught attention in 2002-3 but actually goes back to 2000. Roth was there then. So what was he doing? Surely he didn’t join the Board of Directors without some understanding of the problems? He’s a qualified accountant. He was drawing remuneration for his position. Why is he still there? In comment to the following FT statement: “They were also pulling out of Azerbaijan, Ukraine, Uzbekistan, Bulgaria and Kazakhstan.”
Roth says: “I never heard of these countries until I found out that I had problems in them,” Mr Roth jokes. “So now we don’t have them any more – or we won’t.”
Uzbekistan is next door to Afghanistan – Roth must have heard of that place?
Mr Roth may find these things amusing (as reported by the FT), but I’m certain the many investors and staff who’ve suffered would not agree. So…what lessons can I realistically learn from a man who says he is a qualified accoutant who’s been involved in a horrifying mess, either directly or indirectly and who is still there?
Not many – especially the laughable one about accounting systems. They’ve still not been fixed!
How about: “If you can’t find it on the map you probably don’t know it exists. Therefore, leave well alone before researching thoroughly!”
It follows then that his ideas about going global don’t make sense either. So why print such a statement without analysing it? Respected the FT may be, accurate and incisive it is not. On this occasion.