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Interpublic's Liabilities to Ripped Off Ad Clients Totaled $1.3B -- And It's Not Done Yet

It's always been murky as to how much money, exactly, global ad agency Interpublic (IPG) had to return to its clients after it wrongly booked their media credits as its own revenue. But a look at its annual reports going back to 2002 suggests the figure could be as high as $1.3 billion.

In the "accounting" scandal that emerged in 2004 -- the SEC saw it as fraud -- the ad agency holding company and its McCann Erickson unit failed to give back to its clients millions of dollars in discounts and credits that TV stations and other media vendors had given the company as a reward for its continued business. IPG has been working to reverse the screwup ever since.

The SEC said there were $600 million in restatements, of which $199 million would be returned to clients. Adweek said about $250 million in so-called "volume discounts" was returned. But if you look at IPG's 10-K disclosures with the SEC, you find that IPG's liabilities -- in what it euphemistically terms the "2004 restatements" -- total $1.3 billion, plus another $250 million in legal and investigation expenses.

Here's the breakdown of those liabilities to clients and media carried by IPG by year:

Of course, carrying a liability does not mean that it was an expense that was actually paid. It could be that some of those liabilities are carried over year to year, in which case they are counted twice in the $1.3 billion total. And IPG's numbers were famously restated more than once, so doubtless they don't add up exactly. Unfortunately, when IPG actually pays off the liability it records it as "other income, net" and not as a gross expense, so we can't tell what the actual total is.

As you can see on page 47 of this SEC disclosure, IPG says it recognizes those liabilities as expenses when it comes to agreements with clients over how much they are owed. The most interesting sentence in that disclosure is this:

We release certain of these credit liabilities when the statute of limitations has lapsed, unless the liabilities are associated with customers with whom we are in the process of settling such liabilities.
This suggests to me that IPG intends to keep money owed to clients who are too slow, too incompetent, or who have gone out of business, as long as the statute of limitations has passed. Which explains why IPG says it recognizes the liabilities as either "income or expense" once they're finalized.

IPG has not yet disclosed that it is finished with the reversals.


Image by Flickr user happyeclair, CC.