Having read “The 105th thing on your to do list” you will now know what kind of audit you’re looking to conduct. So what’s the next step? Before you go out looking for an auditor, you need to check that you are actually ‘allowed’ to audit your agency and, if you are, what can and can’t be audited.
And so to find the contract
Your right to audit should be covered in the agency contract and should be fairly easy to find – look in your ‘Contracts’ folder and voilà, a beautifully filed copy of a fully signed contract between you and your agency will be sitting there waiting for you.
But if it’s not there – although you could have sworn that’s where you would have filed it – you need to find out who in the business does have a copy. And is it the right copy? The final copy? Is it the same final copy that the agency has? Do you have version 3.2 and they have version 3.1 in their files? Has it been signed by both parties?
This is fairly easy to miss – in all the euphoria (Marketing) /relief (Procurement) of appointing a new agency, this final hurdle tends to be left to just a couple of people in the business, whilst everyone else is looking at the shiny new toy they now can play with.
If you don’t have a signed copy of the contract, and nobody else in the business seems to have a signed copy, then you may ask yourself is the contract enforceable? Have you just found out that there is actually NO contract between you and the agency?
Don’t panic. In the eyes of the law, the draft contract is the basis of the commercial agreement between you and your agency, even though it hasn’t been signed. So whether you have the ideal scenario where you have a signed final copy of the contract, or not, then you have something to refer to. If you have no contract at all, then you still have a contract with the agency, it’s just that it’s a verbal one.
It’s all in the small print
Assuming you’ve got the right contract, and it’s the one that’s in force, look for the paragraph relating to ‘Audit Rights’. This is where you’ll see what you can and can’t audit. It may define a ‘financial audit’ and a ‘media audit’, set out the scope for each and how often they can take place (commonly once per annum for the former and more frequently for the latter).
In many agency contracts, there will be a paragraph around Audit Rights and a definition of Records. This will define which Records the agency is supposed to be keeping in case you ask for back-up for their invoices.
For a ‘financial’ or ‘contract compliance’ audit, it could refer to amounts reimbursable by the client (i.e. production or media costs), time sheets, out of pocket expenses, salary records, personnel files, reconciliations, etc. If it’s not listed here and not otherwise mentioned in the audit clauses, then you’ll need to ask the agency’s permission to look at it.
It’s therefore very important to understand the definition of Records and how it interacts with the audit clause: if the agency doesn’t have to keep certain information or you can’t access it, then you can’t check whether it’s correct or not.
You’ll also find in the contract how long the agency is bound to keep the Records and this will have a bearing on, how long you, the client, have to audit them. Be aware that the timescales can range hugely (from months to years) and they may not run contemporaneously.
In the UK, the Statute of Limitations dictates that financial records should be kept for 6 years. Don’t assume that the agency has to make them available to you for that long – the contract may only let you access them during its term or for a set period of time afterwards.
And now, the end is near
If you have served notice on the agency, or your contract was for a fixed term and not renewed, then you’ll also need to look for the paragraph entitled “Termination”. This should include details of whether the audit clause survives termination – i.e. can you audit after you’ve terminated or completed the contract. It may also include a timescale so you know if you’ve only got 3 months or 3 years to do an audit.
Hence if you’ve been with same agency for a number of years, put a new contract in place last year and want to audit 6 years’ worth of Records, you’ll need to check both old and new contract to see which years’ data you’ve actually got access to – it may not be all 6 years.
So what if your contract doesn’t have an Audit clause in it? Or what if you don’t have a written contract at all? Does that mean you can’t audit your agency? Not necessarily. If the relationship between the agency and the client is a good one, then they should be more than happy for you to do an audit to check everything is going to plan. They will probably want to agree the audit scope in advance, but this is only normal/good practice anyway.
If, however, the agency declines the request to audit, your internal alarm bells should be ringing. What signal does that send you? It’s only the same as having the mother-in-law come over to run her fingers over the skirting boards, isn’t it? If they’ve been doing their cleaning, they’ve got nothing to worry about then, have they?
Hopefully you will now know what kinds of audits there are, whether you’re allowed to audit your agency, what you can audit and when. The next question is (in the words of Simon Sinek), WHY? But that’s for another day!
TrinityP3 does not provide financial auditing services. We leave that to professionals like Adrian and the team at Financial Progession. We do however provide agency remuneration and contract review services.