The advertising industry has recently earned its place in corporate infamy, as several well-publicized disagreements between the largest agencies in the business and their clients over financial irregularities have erupted in the media. The irregularities are serious enough to have caught the attention of the FBI, which has taken an investigatory interest in clients’ concerns of agencies’ financial wrongdoing, especially in the area of media buying. Advertisers’ suspicion that agencies are making covert deals with the media using their budget funds as leverage have been brought into the open, at times in a confrontational manner.

While these matters are not yet settled, it remains clear that advertising agencies manage billions of dollars of clients’ money despite a lack of effective controls from those clients’ financial departments. Invoices from advertising agencies are often greeted by advertisers with suspicion, yet paid because of fatigue over the seeming impossibility of investigating vast amounts of media buys and ascertaining how much advertising actually ran and at what true cost. Oddly, proper controls over this process are virtually nonexistent, and audits do not seem up to the task. Stymied by legacy accounting tactics, advertisers and the accounting profession have yet to confront these shortcomings.

With the recent allegations of malfeasance, however, audits conducted within the advertising industry will likely need to take on a heavier burden. Internal financial staffs at the agencies, their clients, and their accounting firms will probably be required to look deeper into industry finances. If so, this must be made a part of audit due diligence, including detail testing and a review of internal controls. In the past, outside auditors of both players were not tasked with these types of investigatory procedures, but those days are over. The casual and ill-informed trust that has existed in the advertising industry for years is now a thing of the past, and for good reasons. When the current agency-media finagling came to light, it pierced the delicate veneer of trust between the parties; perhaps more important, the honor system that bound the relationship between agency and advertiser under the shield of contractual law was mostly abandoned.

As a practical matter, without effective verification and controls built into the agencies’ day-to-day media buying process, there was no way for advertisers to be confident that their agencies weren’t violating their fiduciary and legal responsibilities to them. Advertisers, whether intentionally or through lack of understanding, took an irresponsible posture towards their own finances, allowing themselves to be exploited by opportunistic agencies. For many prominent companies, advertising is a large and critical expenditure. But advertising does not come with accounting and control instructions, which is something the accounting profession can and should address. The accounting profession holds the key to restoring the industry’s integrity. In the past, outside auditors were not tasked with investigating transactions and examining controls. But today, CPAs can play a critical role in ensuring the integrity of every transaction that occurs between advertiser and agency.


The modern advertising industry began in Philadelphia in the 1840s, when a small group of entrepreneurs found they could expand the geographic reach of local businesses by placing advertising for their clients’ products in newspapers across the eastern seaboard. By cashing in on their newspaper contacts and leveraging their knowledge of and access to each paper’s advertising rates, they gave businesses entry points into new markets. Many agents, however, were notoriously corrupt, systematically misrepresenting the rates the papers charged. Suspicion that something was wrong was so pervasive that it was said these agents “owed their lives to the fact that there was a law against killing them” (Stephen Fox, The Mirror Makers,University of Illinois Press, 1997).

Advertising does not come with accounting and control instructions, which is something the accounting profession can and should address.

In 1878, N.W. Ayer, one of the earliest advertising agency founders, came up with the improbably simple solution known as the “open contract.” Ayer published a list of each newspaper’s advertising rates for everyone to see; with this information, advertisers immediately had a check on agents’ price claims. This simple control immediately forced integrity on the agencies and facilitated advertising’s transformation into a global industry.

Nearly a century and a half later, the advertising industry faces a new and perplexing control dilemma. While advertising has become big business, there remains no clear method for verifying the veracity of agency media billing. Large advertisers who run huge numbers of commercial messages now realize they have no clear way of determining whether the amounts they have been charged are appropriate. Media costs are more complex than ever before, straining the ability of accountants to adapt to this unique and important category. Rates for TV, radio, Internet, and more are no longer fixed, but negotiated beforehand and then renegotiated multiple times after the ads appear based on contractual expectations of audience delivery, frequency, and other factors. Facebook, Google, and even Amazon are redefining commerce for the 21st century, shaking the foundations of the advertising industry.

In 2015, at the annual Association of National Advertisers’ (ANA) Media Leadership Conference, Jon Mandel, the former CEO of Mediacom, shared his outrage over the growing practice of agencies negotiating rebates, kickbacks, and other duplicitous practices with their clients’ budgets. As described in Michael Farmer’s Madison Avenue Manslaughter (LID Publishing, 2016), “There was nothing subtle about the attack. Mandel was accusing media agencies of dishonesty, if not outright theft.”

This assertion was rooted in several factors. First, agencies were under constant profit pressure from their new holding company owners, the effect of a purchasing wave in the 1980s and 1990s that consolidated the industry into a few major players and hangers-on. At approximately the same time, budget-stingy clients began to intensify the financial pinch on their agencies, as advertisers fled the longstanding 15% commission system for lower standard-fee structures. In some cases, logic and tradition drew some newly stretched firms to turn once again to their founding strength—the intimacy between themselves and the media. Allegedly, the hungriest agencies made side deals with the media, promising favoritism to their programs in exchange for deep discounts. In effect, agencies were negotiating economies of scale with their clients’ budgets without necessarily sharing this confidential deal with those clients.

A frenzy of charges and countercharges, as well as threats of litigation, followed Mandel’s allegations. Both the ANA and the American Association of Advertising Agencies (4As) had no choice but to get involved. At first, they tried working together, but cooperation soon broke down, as the 4As understandably took a posture in defense of its members. As described by Ken Auletta in Frenemies (Penguin Press, 2018), between 2015 and 2016 advertisers pulled an unprecedented $50 billion worth of advertising from agencies in protest over the lack of financial controls cited in Mandel’s presentation. This act of defiance put the agencies on notice: get your financial house in order, strengthen your controls, and don’t make side deals that reward the agency but not its clients.

Agencies were negotiating economies of scale with their clients’ budgets without necessarily sharing this confidential deal with those clients.

In 2016, the ANA hired K2 Intelligence, a leading investigatory firm, to conduct an inquiry into industry practices. After interviewing many current and former advertising agency employees, K2 determined that a meaningful number of agencies, as suspected, were indeed negotiating kick-backs from media outlets in exchange for directing their clients’ money to those most willing to engage in back room dealing. The findings were included in a comprehensive report published by the ANA (An Independent Study of Media Transparency in the U.S. Advertising Industry, June 7, 2016, While many advertisers and industry observers consider the practices detailed in the report to be an indictment of the agencies, the 4As challenged the report’s conclusions, saying among other things that it was biased and based on anonymous, and thus questionable, sources. The industry was soon at an impasse over the report’s validity and what to do about it. Finally, as noted above, the FBI has taken interest in the case, and criminal charges may come at some point in the future (Nicole Hong and Susanne Vranica, “Federal Prosecutors Probe Ad Industry Media-Buying Practices,” Wall Street Journal, Sept. 27, 2018,

A new approach toward controls is clearly needed to bring trust and integrity back to the advertising industry. The remediation process must consider fundamental aspects such as the nature of controls over media buying, who should hold responsibility for them, and how they are integrated into the operations of agencies and advertisers. Furthermore, outside auditors should include in their work a review of the financial dealings of the advertiser/agency partnership. As auditors take up this burden, their ability to carry out their oversight responsibilities will only improve. But first, basic controls over media buying must be established.

How Media Buying Works

Since Ayer’s open contract, media buying has followed a traditional path: an advertiser approaches an agency with a budget, and the agency puts together a media plan for a certain amount of time or space on television, radio, magazine pages, the Internet, or all of the above, meant to attract attention of, and increase product demand from, a group of likely consumers. Once the advertiser approves the plan, the agency goes to the negotiating table to buy the media at the lowest possible price.

As the media runs or airs, changes to the plan routinely occur; for example, ads may be preempted by a news event, or the advertiser may make a last-minute budget cut and have the agency cancel some media buys. In these transactions, the agency plays the middleman, billing the advertiser for the cost owed to the media for its time or space and sending those funds on to the media outlets. This trio of participants completes the first phase of the transaction process.

These multifaceted transactions are not a final settlement and will not be until possibly months later, when the data reflecting audience delivery is delivered by various tracking companies, such as Nielsen and the Audit Bureau of Circulations; only then can a final bill be tallied and submitted. If a particular buy falls short on audience delivery, or circulation for publications, a new deal will be struck with the media. This can entail anything from a “make-good,” whereby additional media is provided at no additional cost, to a negotiated cash adjustment.

At this point, the flanking participants, advertiser and media, will complete the transaction; the media will provide an adjusted bill to the agency, which will rebill the adjustments to the client. This process requires sophisticated computer systems and training on how to use them, expertise in managing the multiple layers and parties, and experienced financial staff. It includes the clearance of an enormous volume of transactions, each of which must be individually resolved, adjusted, appropriately accounted for, and settled. The agency must demonstrate a high level of professionalism and knowhow in order to satisfy its fiduciary responsibilities to the advertiser.

Advertisers rely on a stack of controls over agency bills as their bulwark against overbilling, inappropriate billing, and fraud. These include the agency contract, detailed reviews of agency billing, and audits of the agency’s transactions with the media outlets. Contracts are useless, however, if not followed; reviews of agency billing will never find hidden deals, and typical agency audits will never locate what is intentionally buried. While there is no universally accepted method for advertisers to verify agency media billing, verification is possible, and the industry can achieve solutions to controlling agency media buying through an effective application of a basic accounting concept.

Accounting Controls for Agency Media Billing

For decades, advertisers have been looking at the problem of verifying advertising agency billing from the wrong end of the telescope, attempting to go over each buy in the media plan with a fine-toothed comb. This is virtually impossible to do without a small army of dedicated investigators who would cost more than they would save. Consequently, advertisers invariably give up after testing a few transactions without finding anything out of place; as a consequence, they nurture the false belief that nothing is wrong when in fact the opposite is often the case. Also, auditing is not a substitute for controls. Auditing is intended to check that the controls in place are working as planned. But what is the right control for agency media billing?

An advertiser receives numerous bills from its agency, listing every buy in the media plan and every adjustment to those buys. The bills include the cost of the media as well as any agency compensation, whether there is a commission or a fee arrangement. All bills to the advertiser issued by the agency can be summarized as follows:

Billing = Cost of Billing(media) + Agency Revenue

Each term in the above equation is represented by an account on the agency’s income statement. The question to be resolved is, what is the true “cost of billing” the agency incurred with the media?

Contracts are useless if not followed; reviews of agency billing will never find hidden deals, and typical agency audits will never locate what is intentionally buried.

The key to solving this equation is the fact that agency media billing is a product of a double-entry accounting system; in other words, each media transaction affects both the agency’s income statement and its balance sheet. Therefore, at any point in time, the agency has a capital position with each of its clients that can be summarized as follows:

Cash + Receivables(advertiser) − Payables(media) = Capital

While agencies do not maintain separate client cash accounts, it is possible to determine each client’s cash position at a point in time. Advertiser receivables and media payables are supported by client-specific subsidiary ledgers and therefore readily available, leaving the capital as the only unknown. But the capital is easily determined and is in fact the linchpin of the accounting control over the veracity of billing throughout the entire media plan. If there are no billing irregularities in the agency’s accounting system, then the following relationship should be easily verified:

Capital = Agency Revenue

In other words, the agency is entitled to no more capital than allowed by the compensation arrangement. Because the agency revenue is known to the advertiser through both the compensation agreement and the billing, then the advertiser also knows the exact amount of capital that should be recorded in the agency’s accounting system as a result of all the transactions among the agency, media, and advertiser. If there is any discrepancy, the evidence will be found in excess capital in the agency’s books of account.

These equations are essentially an application of the concept of balance, the most basic tenet upon which all accounting rests. There is some irony here in that so fundamental an aspect of accounting, with a history of application going back to the Middle Ages, provides the solution to a complex, 21st-century control problem.

No matter how small a discrepancy is, it is detectable with absolute certainty by constructing what amounts to an accounting of all the transactions among the media, the agency, and the advertiser. Since by contract, as well as commercial law, the client is fully entitled to such an accounting for financial activities carried out on its behalf, any anomalies or irregularities ought to be readily discoverable.

This leaves only the problem of determining the cash balance for a particular client. The solution is simple. First, at the beginning of the billing cycle being reviewed, the advertiser obtains the receivable and payable subsidiary ledgers. With this as a starting point, the agency revenue is zero and the cash balance is struck as the difference between the two ledgers. The rest is a simple matter of adding the payments the advertiser made to the agency throughout the year and deducting the payments the agency made to the media to arrive at the ending cash balance.

Clients have the right of access to every transaction supporting the data behind the bills; only then can they truly evaluate the facts behind each expenditure.

It is important to note that controls are generally designed to prevent errors and mischaracterizations. They are not, however, efficient at unearthing deliberate acts intended to hide financial misadventure. Such inclusions require a more elaborate control setup with the express intention of spotting maneuvers meant to spoof the system. While it is possible to erect controls to prevent the kind of malfeasance mentioned in the K2 report, they are more difficult to identify, require more elaborate procedures, and are more appropriately managed by industry-wide efforts to establish compliance with financial standards.

Opening Up the Books

Currently, an agency provides its clients with a stack of bills representing past activities. Greater strategic control over the media plan comes out of the client’s accounting system, which is exclusively maintained by the agency on the advertiser’s behalf. The books are closed to everyone but the agency.

This needs to change. Clients have the right of access to every transaction supporting the data behind the bills; only then can they truly evaluate the facts behind each expenditure. These details belong to the billpayer and ideally should be made available as a matter of routine. With all of the fundamental data interpreted into easily understandable language, advertisers will have a new tool at their disposal and gain insight into the development or continuance of their media strategies, as well as a new mastery over the finances of their marketing plans. The structure of this accounting process can only operate as designed when a full complement of information is submitted to the advertiser. At this point, “client accounting,” which the advertiser pays the agency to maintain, is in effect turned into a control tool that can be used to better manage the media plan.

The agency’s income statement and balance sheet are in fact deliverables to be furnished to the advertiser. When these elements are known, the client has a stronger control. Better management of costs often turns up unspent funds, which in turn enhances the efficiency of media expenditures.

Once an advertiser has set in place a process by which it can confirm the veracity of agency billing and has informed the agency it is exercising its right to oversight, anomalies anywhere throughout the transaction process can be eliminated. This establishes the transparency that the industry has been calling for and that advertisers need if they are to work in true partnership with agencies. It creates a balance to the relationship whereby both parties will have equal access to the salient information and thus can work in closer partnership at managing the advertising budget. With the elimination of irregularities in the finances, the relationship between agency and advertiser is more balanced and focused on the common interests of each.

Once media billing is verifiable, it lends itself to the benefits of electronic data interchange (EDI), enhancing advertisers’ ability to manage their advertising finances and collaborate with agencies at a more strategically useful level. Now, instead of the agency submitting stacks of invoices, it can provide the advertiser with all the electronic records that go into the billing, including demographics, day-parts, areas of dominant influence (ADI), and other data contained in the agency’s media systems. This is mutually beneficial, as it places both parties in a strengthened position to build the next phase of the advertiser’s marketing plan.

There are other benefits as well. The information is not only more complete; it is single sourced. Each product group and each department in the advertiser’s influence chain is now identically informed of the salient financial information from the marketing program, including all the strategic information and the conclusions that can be drawn from it, including accounting. Most advertisers process agency billing through manual, paper-driven processes that make accounting unreliable as a management tool. By downloading the billing directly into the advertiser’s books of account, each department is not only working with better information, but with information that is now linked to the accounting records—and therefore more impactful and actionable—as well as available in a contemporary form.

It also eliminates all the clerical processing of invoices; individual invoices, of which there can be hundreds each month, no longer need to be routed from one department to another, reviewed, approved, and manually entered into the accounting and budget systems. Instead, they are downloaded once and available to all departments, and in a more reliable and timely manner to boot.

Finally, after the media airs, the agency provides the advertiser with a report on the effectiveness of the media plan that shows how much exposure the advertiser got for the money it paid. This post-mortem analysis is the agency’s report card on its media planning and buying prowess. Of course, the agency is anxious to show it did a good job; however, there are ways to manipulate such information. Without a means of verifying the data in the report, the advertiser is denied an important check on the agency’s performance.

The report essentially compares two metrics: cost and audience delivery. The cost information is too difficult to verify when the advertiser is processing thousands of invoices that make up the cost, but switching the delivery to EDI makes this verification possible. The audience delivery can also be verified through published sources; this makes the agency more accountable to the advertiser, who is now in a stronger position to manage the finances of its advertising.

Currently the advertising industry is working without the fully integrated client and agency computer systems necessary to create a seamless flow of information. This can and must be overcome. Computer linkage will enhance the unification and completeness of the exchange of data, standardize transaction details and rationale among all parties, and likely establish a greater feeling of teamwork, which itself will add a more personal control to the process. It will also fundamentally change how the industry transacts business and enable advertising to be managed more efficiently.

The Role of the Accounting Profession

Financial change is coming to advertising, and accountants must lead the way. The legacy systems that worked adequately in the past have reached their limitations, and once the change begins, there is no telling how large the industry will grow as systems and procedures accommodate its expanding dimensions.

Auditors of advertising agencies need to satisfy themselves of the integrity of the agencies’ finances with respect to their clients. Certainly, reviewing the agency’s controls over its client accounting and including assurances in the management representation letter that all client contracts have been scrupulously adhered to would be important audit steps, but auditors also need to test for compliance. In addition, since the media buying process is managed through a specialized accounting system, it is relatively easy to balance the agency’s media accounts to determine there are no discrepant transactions or hidden sources of revenue, and that the agency has not violated contractual agreements or commercial law.

The accounting profession has a unique opportunity here to assert itself and take a more active role in managing the industry’s finances.

Auditors of advertisers need to review their clients’ procedures to ensure controls like those suggested above are in place over agency billing. Because this will lead to changes in management information systems, as well as automation of some manual processes and procedures, auditors will need to review these controls and perhaps play a role in helping clients devise new control frameworks from which they can better manage advertising expenditures.

Accountants Must Take the Lead

The recent financial controversy within the advertising industry sheds light on the need to replace ineffective controls with effective ones based on the unique nature of this business. The accounting profession has a unique opportunity here to assert itself and take a more active role in managing the industry’s finances. Modernization of all things financial must take its place within all the working entities—agency, client, and media—that participate in the industry’s commerce, including stricter accounting and auditing processes. Just as important is the need to integrate these controls into more advanced financial systems so that the long-overdue automation of data exchange between advertiser and agency can truly bring the industry into the 21st century. While this has the potential to fundamentally alter the financial dynamics of advertising, it should be based on the application of sound accounting theory and practice. In this new environment, where controls over the transactions of an entire industry need to be redefined, the accounting profession must lead the way.

Marshall Garber, CPA is an adjunct professor at the Stan Ross Department of Accountancy at Baruch College, New York, N.Y.