Out of home advertising is fraught with risks

Advertisers may be losing up to approximately INR one million on marketing budgets of about INR ten million for a variety of reasons

Image: Daniel J. Rao / Shutterstock.com

The buying process for outdoor advertising space can be complex, time-consuming and potentially a costly exercise for brands and advertisers. These reasons have led advertisers to employ agencies that are more resourceful and experienced. They also offer an opportunity for powerful negotiations and cost savings on behalf of independent advertisers. To ensure greater transparency and accountability, contracts are typically drawn between advertisers and agencies with clauses that have the agency deliver benefits such as discounts received from vendors and others back to the advertisers. However, does this really take place?

Here are a few questions to ponder over: How many agencies voluntarily pass on the discounts to advertisers? Do advertisers take adequate measures to ensure that they receive the full value of discounts which were due to them?

Given the nature of the business and the operating environment, there are chances of many gaps which may rise in the outdoor advertising or out of home (OOH) industry. Operational inefficiencies have, therefore, been one of the key concerns plaguing this sector.

A high stakes game In 2014, conventional outdoor media surpassed expectations and grew by 13 percent, as against the projected growth rate of 7 percent. The Pitch Madison Media Advertising Outlook 2015 expects outdoor advertising to grow by 6.2 percent, taking this total advertising market to Rs 2,371 crore. Higher OOH spends are expected from ecommerce companies, retail, telecom, apparel, jewellery, handsets, and infrastructure companies.

The fraud element
Apart from operational inefficiencies, another rampant reason for advertisers incurring higher costs or getting lesser value for money could be due to fraudulent conduct by employees, agencies or third parties. The error rates in this area are estimated to be about 8-10 percent of their annual spend. Advertisers may, therefore, be losing up to approximately Rs 1 million on marketing budgets of about Rs 10 million for a variety of reasons.

Example 1:
The global management of a media agency suspected inappropriate practices followed by media buying employees in its Indian entity. There were rumours in the marketplace that employees of the Indian business were receiving kickbacks from media owners (vendors). They also noted that the profitability of its Indian entity is very high compared to its peers in the industry. In addition, it was suspected that there could be potential non-compliance of contractual terms with advertisers and risk of employees potentially defrauding the company. Since the issue was sensitive and involved possible loss of reputation and business continuity risks, they found it pertinent to engage a forensic team to have a look at their company’s financial books. The objective here was to understand if the profits were legitimate and uncover if there were any revenue leakage issues or high cost charge backs to the clients.

Some of the key fraud risks that are generally observed are highlighted below:

• No standardisation or benchmarking of rates charged for display sites – As a result, the rates are potentially open for manipulation. This provides a huge opportunity for collusion between the owner of the space and employees of the agency.
• Lack of tracking systems for service provided – Today, there are little or no monitoring systems in place to track if advertisements are being displayed at multiple locations for the entire allocated duration. Consequently, the owner of the site may lease the same space to another advertiser, or for another advertisement, during the same period. The evidence of delivery is normally a photograph of the location and this could either be forged, or multiple photographs of the same location from several angles are provided, for demonstrative and counting purposes. Sometimes, a photograph of one spot may be provided for multiple locations.
• Sale of printed material as scrap – The printing of such advertisements is usually done on flex material. During most negotiations, the credit for scrap value is not factored in during the costing presented to advertisers.
• Kickbacks from vendors to agencies and/or collusion between advertiser employee and agency employee – The agency employees usually battle it out through their negotiations on behalf of the advertisers. The field employees, however, are aware of the actual worth of the site and the performance of the site owner. However, they may ask the vendor to inflate the invoice value due to the following reasons –

1. To benefit the agency - By earning profit on the transaction (this is over the 7-15 percent commission that the agency is ideally entitled to obtain) without passing on any benefits to the advertiser. In order to camouflage profits, the agency may invoice the vendor for technical, professional or advisory charges for which no work is actually done.
2.  For an employee’s personal gain – This could entail getting kickbacks from the vendor. It is also possible that an employee from the advertiser’s team is fully aware that these invoices are inflated, as they may also be getting their share of the cut in the process.

• Potential conflict of interest situations – Employees may raise invoices as a vendor or through their related parties, resulting in potential conflict of interest situations. This can go unnoticed if there is no third-party due diligence being carried out by the company.
• Inclusion of costs not mandated in the estimates to inflate invoice values
• Misrepresentation in the books and records

Conclusion
In order to mitigate such possibilities, there is a greater need for advertisers to monitor and perform regular reviews of their own employees, media agencies, media vendors and adequately allocate budgets to identify fraud and abuse. This requires an experienced team of professionals who have adequate industry knowledge as well as a forensic outlook.

It is time that advertisers proactively identify gaps and potentially save costs by fixing them at various levels. Also, agencies need to ensure better monitoring to safeguard their reputation and avoid business loss due to unethical practices followed within the business.

- By Mukul Shrivastava, Partner, Fraud Investigation & Dispute Services, EY India

The thoughts and opinions shared here are of the author.