Five reasons China is always on the list for media contract compliance
Whenever major global or regional clients select countries to be included in compliance audit programs from the APAC Region, you can be sure that China will be first on the list, says Jocelyn Wang, managing director, China, at FirmDecisions.
Right now is that time in the year when we are at our busiest. It is when brands really look at their contracts and how they are working with their agencies and partners. Good governance of media and marketing spend increasingly demands brands conduct regular financial compliance audits, assessing the extent to which agency partners have managed their marketing budget according to the terms of their contract. Whenever major global or regional clients select countries to be included in compliance audit programs from the APAC Region, you can be sure that China will be first on the list.
In part, this is because of the size of the country and the scale of billings that major advertisers invest in this ever-more important market, although those aren’t the only reasons. There’s also a strong perception from outside that China is a particularly non-transparent market that requires a keener eye than most. I’m often asked if this is fair. It’s true that there are the usual contract compliance issues that arise in most countries, from unbilled media to a lack of timesheets for fee-based clients, from non-transparent programmatic to inventory media services. But what is it that makes China stand out and top of the list of countries in our region to be audited? I think there are five reasons.
1. The high incidence of brokers
Unlike many other major markets, much of the media traded in China is not direct between advertisers and agencies, which then buy inventory from publishers, broadcasters, and platforms. Brokers play an important ‘middleman’ role, and wherever there’s a middleman there’s the opportunity for salami slicing of budgets and value erosion. Brokers introduce a lack of transparency and an additional layer to what can often be a murky transaction, making it more challenging to know the true cost of inventory at the media vendor level. There’s also a suspicion of a hidden financial relationship between brokers and agencies.
2. Taxes are complex
Taxes in China are complicated, and the rates always seem to be changing. It’s challenging for advertisers to keep track of whether the right tax or level of tax is being charged on media and marketing spend. Where changes are made to tax levels, it’s important to determine whether retrospective adjustments – theoretically in the advertiser’s favour – are refunded to them down the transactional chain. It can also be hard to know whether agencies make the tax payments required to the tax office, and it is not uncommon for the commission to be charged on the VAT on media invoices. With such a complex, fluid, and opaque system, advertisers need clear-eyed, expert advice to navigate the tax minefield.
3. Debates over rebates
Rebates are a bone of contention between advertisers and their agency partners around the world. In China, there are four specific areas we often find demand special focus:
- Are all rebates declared and returned back to the client?
- Whose responsibility is it if rebates are lost when the agency pays the vendor too late?
- What happens with dual contracts?
- How are cash and non-cash rebates reconciled with billings?
4. Pre-payments and deposits
To secure good deals with better margins, vendors often ask for pre-payments or deposits on the account. Because these can fall in different accounting periods or campaigns get delayed, it’s crucial to ask whether and how agencies are monitoring and reconciling pre-payments and deposits on account with final and actual billings. With agency and client staff turnover – or simply from a lack of adequate record keeping – it can be too easy for serious money to slip through the cracks.
5. “China is different”
We often hear both agencies and advertisers claim that “China is different” and so requires special treatment. This has led to cases where Chinese agencies and clients believe that global MSAs don’t relate to China as if China were its own planet. This means advertisers and agencies develop their own local service agreement – usually in Chinese – and this often doesn’t duplicate the terms of the global MSA. It makes little sense to have different terms for different markets, however differently they may operate.
Making China work for you
The key to gaining comfort and embedding trust in the relationship with your agency partners in China is – as in every other market in the world – the contract. At FirmDecisions we are currently working with the World Federation of Advertisers to create guidelines and a model media agency contract in China. The principles guiding the WFA model contract are the principles of best practice in agency contracts, specifically:
- Keep it current, regularly updating terms to meet new market or trading conditions
- Make sure it protects your best interests
- Ensure it’s comprehensive, covering all the agency’s services and those from related parties
- Include an exhaustive ‘right to audit’ clause that allows you to choose an auditor, one that is not subject to agency approval, thereby avoiding conflicts of interest
- Make sure that all paperwork is auditable, without restrictions
- Set rules about how you want to deal with the China-specific issues detailed above, from brokers to taxes, from rebates to pre-payments
Establishing and sticking to good practice
While many contracts are honoured and complied with during the honeymoon period, the reality is that people get busy, forget about contracts, move jobs. Reports that should be provided to clients monthly or quarterly can soon be forgotten, as both client and agency focus on their “real” job. With attention elsewhere, contracted timings of returns of rebates can get overlooked and broker selection rules ignored.
It’s the very busyness of day-to-day business that means the audit clause needs to provide the ultimate protection for clients, especially in large, multi-layered markets such as China. Ultimately, the best way to ensure your best interests are protected is to focus on the contract and test its efficacy and levels of protection by conducting regular – often annual – financial compliance audits.