It is management’s job to maintain a system of internal controls so that the financial statements will be reliable. This holds true whether you are a mid-market company or a global enterprise. although the risks and penalties for failing in this core responsibility rise exponentially in large, public companies.
In the case of the consumer products/retail industry, the administration of trade promotion plans and paperwork is a huge headache and expense but since the year 2002, suppliers especially, but also brokers and retailers, have had another compelling reason to to do this right – Sarbanes-Oxley (SOX).
With trade marketing promotions accounting for 10- 25% of gross sales for many companies, this huge investment that requires monitoring, not only for return on investment, but also for compliance with the laws. Because of the large number and complexity of trade deal transactions, a sizable percentage of trade promotion deductions turn out to be invalid or excessive as the customer may not have performed according to the rules. Careful auditing by the supplier is required to avoid losing profits, and running afoul of SOX.
Inadequately documented and tracked promotions fail on operational as well as SOX compliance levels including:
- An inability to account properly for promotion expenses by product;
- Inability to gauge the effectiveness of a trade promotion;
- Opening the door to erroneous customer deductions; and
- Opening up price discrimination questions under the Robinson-Patman Act of 1936.
Section 404 of Sarbanes-Oxley requires that you document having solid controls and processes, including:
- A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company;
- A statement by management identifying the framework used to evaluate the effectiveness of this internal control;
- Management’s assessment of the effectiveness of this internal control as of the end of the company’s most recent fiscal year; and
- A statement that its auditor has issued an attestation report on management’s assessment.
Trade Promotion Management Practices
Here are some tips that should enable vendors to optimize trade promotion programs and stay out of regulatory trouble. The point of “trade promotion”, of course, is to promote your products, increase sales and profits. The science of the discipline is to understand what trade promotion strategies work best in which markets with what timing.
This is a rare case where you can improve compliance with government legislation and improve your profits, too. Better tracking of trade promotion expenses and improving controls will enable you to optimize these programs for increased sales.
- Systems. If you are not using a trade promotion planning system that is integrated with back-end deduction processing, you are missing a big opportunity to catch the inevitable incorrect and excessive deduction errors that occur. Even small companies that previously could not spend the money on an in-house system can license a powerful hosted application that works over the web.
- Clarity of Deal Formats. Many deals are misunderstood because they are not written (or formatted) for quick understanding at clerical levels, resulting in excessive or otherwise incorrect deductions, mistakes and confusion. Remember that your customers are dealing with hundreds of supplier deal formats and they do not have time to decipher incoherent trade promotions. Even the best structured trade promotion can be misunderstood but to minimize the chances, make sure every deal is clearly and completely communicated and understood by your people first, then by brokers and the customer.
- Brokers. Many companies use brokers to manage their trade funds, the idea being they are closer to deal execution. This can be effective; however, while you can outsource the work, you can not outsource the responsibility for legal compliance or for your profits since you will take the loss for any errors. You must have a trade promotion-deduction audit function to audit broker performance. Most broker-organization are very professional and competent, but do not lose sight of the fact that when it comes down to it, your customer is their meal ticket and primary concern.
- Open Checkbooks. Review and minimize sales representatives’ use of “open checkbook” types of programs which provide little opportunity for tracking and validation.
- Documentation. Sarbanes-Oxley requires documentation for trade promotion expenses. You can use this to your advantage with the customer to make sure that scheduled promotion activities took place when and where they were intended .
- Erroneous Deductions. Paying for the promotion when the execution does not match the deal may be the path of least friction but will set a bad precedent, continuing problems, and cause later headaches with your auditors, and potential SOX problems. You need to reject and pursue deductions/claims that do not match-up with the promotion.
- Deduction Management Systems. Since 10%-20% of customer deductions are either invalid or excessive, you need a state of the art deduction management system in order to process and track trade promotion deductions, and optimize recoveries of deductions.
- Post-Audits. Over-reach by post-auditors is epidemic and very costly including the application of incorrect deals from invalid markets, double and triple deductions. Please review our Solutions section for Post Audit guidelines and view a sample Post Audit Policy document for more information.