• by Joe Mandese  @mp_joemandese, September 16, 2005

Beleaguered ad agency holding company Interpublic, once one of the most respected ad companies in the industry, Thursday disclosed what it described as "possible employee misconduct," including "instances of falsified books and records, violations of laws, regulations and company policies, misappropriation of assets, and inappropriate customer charges and dealings with vendors."

The disclosure, which couldn't come at a worse time for Interpublic, the parent of Initiative, Magna Global, Universal McCann and other agencies, couldn't have come at a worse time, as the company restated its finances to investors yet again. The disclosure also follows a downgrade by a major Wall Street securities firm, Merrill Lynch, which last week moved Interpublic to a "sell" from a "neutral" rating.

In the filing, Interpublic said its internal probe is nearing completion and that "culpable employees have been terminated or are in the process of being terminated or are otherwise no longer with the company." Nonetheless, the news of potentially rampant fraudulent activity inside a giant advertising company that has already acknowledged lax financial controls that have led to a series of financial restatements, is troubling news for Interpublic and Madison Avenue at large.

Interpublic said that the misconduct relates "primarily" to agencies outside the U.S., but it follows a number of high profile cases of fraud in the ad business, including a highly public trial of former Ogilvy & Mather and MindShare employees who pleaded guilty to fraudulently over-billing the U.S. government for their work on the White House's anti-drug campaign.

Madison Avenue has a long history of lax financial controls that have led to earlier scandals, but most of those agencies have managed to rehabilitate themselves. During the 1980s, a scandal involving J. Walter Thompson's once powerful TV syndication unit, led to the downfall of that operation when it was revealed that the unit fraudulently billed clients for millions of dollars of syndication buys that never ran. Most of the improprieties involved individuals working with the agencies, such as another 1980s example of fraud, when a former Grey Advertising account director pled guilty to criminal charges for billing client Procter & Gamble for commercial talent fees that went into his own account under the name of the William Morris talent agency. More recently Grey was implicated in a scandal involving fraudulent client billing involving a printing services provider Color Wheel.

In most of those cases, the agencies managed to overcome the internal financial scandals, because they were isolated instances and because they had stability overall, but in the case of Interpublic the bad news just keeps piling on, including an unprecedented number of major client defections, and continuing revelations of weak financial controls.