How important is auditor independence in media auditing?
In recent years auditor independence has been increasingly scrutinised. Many audit firms have taken action to restructure or sell off the parts of their businesses driving client conflicts.
Accenture closed its leading global Media Auditing business in August 2020. Its agency and marketing services business inevitably created an unresolvable conflict of interest for its media auditing business.
PwC sold off their media and marketing division in 2024. Despite it being a high growth area, PwC’s vast client base meant the media practice encountered conflicts with its own clients on some of their projects.
The challenge of managing conflicts in the media industry has always existed. The critical interdependency between advertisers, media agencies and media owners makes the industry especially intertwined and media audits have to be carefully managed. With media agency audits it has always been widely considered that it was not possible for the same auditor to be able to review an agency’s books on both the advertiser ‘client’ side and the media owner side. An agency’s competitiveness depends on their pricing, discounts and rebate values remaining totally confidential and giving a party outside of their organisation access to both buy side and sell-side information is very risky.
If an auditor were to review a contract between an advertiser and their agency as well as reviewing the related media spend contract between their agency and the supplying media owner they would know the entire revenue stream. This puts them in a highly privileged but conflicted position if they act in some capacity for both client and media owner. Clearly advertisers would hugely benefit from knowing how much agencies are paying for the media they are buying on their behalf. Similarly, media owners would hugely benefit from knowing the prices their agencies are charging advertisers for the media they have supplied.
However it’s not just the auditor independence between clients, agencies and media owners that needs to be considered.
It is also critical that there is independence between an auditor’s own clients. As post Covid audit and consulting revenues have suffered, auditors have been pressurised to sail closer to the wind with regards to their independence, potentially taking on work that they shouldn’t and claiming that they have the appropriate safeguards in place. Resultingly, some auditors may perform the same audit service for competing organisations in the same industry. For example, a media auditor may be instructed to perform an audit on behalf of a media owner. To quickly build revenues the auditor can pitch the same offering to other competing media owners. This model is historically how audit firms build their business. It has great advantages:
The auditor can train one team to perform a service and then duplicate that service across many companies. The team can build specialist skills and experience in that service and be perceived as experts
With every additional client that takes on the same audit service the marginal cost of performing each additional audit declines meaning higher profits for the auditor
The costs of typically expensive tooling, data and software can be spread across multiple clients reducing the cost of performing each audit
So what’s the issue…
In order for an auditor to be wholly independent they should not be auditing for competing businesses especially when the pot being audited is the same for each of their clients.
How can an auditor be considered fully objective if findings on an audit for one of their clients also impact the audits of their other clients. It’s simply not possible.
In an ideal scenario a separate audit firm would act for each of the clients in question. This is great in theory but this can be challenging as specialist auditors are not in abundance.
Auditors are not consultants. Consultants are not auditors (American Association of Advertising Agencies - Audit Guidance Directive)
There is an increasingly blurred line between auditors and consultants yet the two are completely different. The concept of an audit offering a bolt on service of consulting totally undermines the principal of independent audit, as information being obtained for audit can potentially be used for means way beyond the purpose of the audit. This breaches non-disclosure and confidentiality arrangements the auditor has in place with the auditee.
The UK audit regulators already stamped out this process for statutory auditors of listed businesses in the UK through the FRC’s regulation following the Brydon review. This regulation dictated that if you were the statutory auditor of a company you were highly restricted in what other services you could offer that business. Profitable consulting services were a strict no as the lucrative revenues were seen to limit the objectivity of an auditor. Further the Big 4 were forced to separate their auditing divisions from the rest of their operations. Whilst this regulation only impacted large firms and listed businesses the underlying principal remains for all auditors of any sized business. Arguably the impact is even greater with small audit firms who are likely to have a fee dependency on just 1 or 2 clients. Small audit firms also don’t have the ability to appropriately segregate their teams between clients and put effective ‘chinese walls’ in place to ensure confidential information isn’t shared accidentally or intentionally between two different teams. In fact in a small firm it is highly likely that one auditor could be working on all of the conflicting projects at the same time increasing the risk of leakage.
How to ensure independence?
1) Ensure your audit firm is a member of a regulatory body
The Institute of Chartered Accountants in England and Wales (ICAEW) offers its qualified members the right to obtain a Practising Certificate and be members of the Practice Assurance Scheme. To obtain this accreditation requires an ACA qualification, annual training and a commitment to the highest levels of ethics and confidentiality. Without this certification there is no guarantee that an auditor will adhere to these intense professional standards.
Audit firm membership of a regulatory body not only means that audit firms are subject to regulatory body reviews of their adherence to recognized professional auditing methodologies and ethical standards, but also provides the client and the agency with access to disciplinary procedures that is not available for those audit firms that are not a member of a regulatory body and who are consequently only accountable to themselves.
2) Obtain a list of your auditor’s clients.
If your auditor is acting on behalf of your competitors how can you be sure your information will not be accidentally leaked. How can you be sure that the services you are paying them to perform for your business are not going toward findings for your competitors.
3) Understand the services your auditor performs.
A truly independent auditor will perform audits and audits alone. An auditor who offers consulting services is at risk of accidentally (or intentionally) using information deemed solely for purposes of an audit for consulting purposes. The inverse is also a risk.
The choice is simple if you need an auditor employ an auditor. If you need a consultant to, for example, gather market intelligence for you, then employ a consultant to do just that.
These views are my own and are based on my 22 years auditing at PwC, 10 years of which have been focussed on auditing media agency deals. As a fully independent third party auditing firm, JLL Media provides media auditing services with the highest integrity and independence in mind. We have a small and select client base to ensure we do not work with competing clients.
JLL Media hold an ICAEW Practising Certificate and are a member of the ICAEW Practice Assurance Scheme (Firm number: C011004915)