List Accountant Starts Auditing Firm
David Palmer said yesterday that he started Audix Assurance Services LLC because the industry still lacks standard accounting practices. He began his career in the list industry as a special projects accountant at Direct Media Inc. in July 1995 and left in January 2000 to become controller at then newly-formed Merit Direct LLC, where he remained until Oct. 15.
"After I started at Direct Media, one of the major projects that I worked on was the Kleid bankruptcy, and I have had this idea for years," said David Palmer, a certified public accountant and president of Audix Assurance Services LLC, New Rochelle, NY.
Kleid Co. filed for bankruptcy in March 1998 raising widespread questions in the industry about the company's handling of rental income owed to list owners. Allegations flew with more than $14.6 million owed to more than 200 creditors and list industry claims that the company was floating receivables to cover operating expenses.
Palmer also pointed to the August 2002 bankruptcy of Alan Drey Co. as an indication that these types of scenarios can still happen. At the time, he had hoped for an outcry for accountability within the industry but said it didn't happen.
"Are people going to wait for the next list broker or list manager to file for bankruptcy and then write off millions of dollars worth of receivables to all of a sudden have a wakeup call?" he asked. "It's the only industry I know in which other people's money is being handled by a company in which there are no standards, no rules of conduct and money just kind of flows unaccounted for in and out. An area I am particularly concerned about is floating receivables."
Though he has not signed up any clients yet, Palmer said he sent a mailing to hundreds of list owners on Oct. 25. He said his goal is not to get in the way of the relationships between list owners and managers. The cost of Audix's services will depend on the volume and number of list managers a list owner uses, he said, though he would not elaborate on any specific scenarios.
"I believe that list owners should trust their list managers, but the balancing act with trust is verification," Palmer said.
Direct Media Inc., Greenwich, CT, one of Palmer's former employers, recognized trust issues in terms of industry accounting practices two years ago when it released its Pledge of Financial Integrity. The pledge was a set of guidelines that among other things mandated that list companies keep list owner funds separate from operating funds and pay list owners on a timely basis.
As for the need for independent audits, Direct Media CFO Rick Sarli said his company stands by its practices but also welcomes clients to audit them.
"Direct Media has always cooperated with our list owners whenever they felt the need to conduct a review of their financial records," Sarli said. "Sometimes the reviews are internal reviews and sometimes they are completed by independent accounting firms."
His greatest concern is maintaining the confidentiality of the clients' data and information.
"If I were not convinced that the party coming to do an audit was independent enough to do that, I would not allow it from a confidentiality perspective," he said.
Though bankruptcies do happen on occasion, Sarli was not convinced there was much that could be done to prevent those types of losses.
"Quite frankly, my experience would say no matter what procedures you put forth you're never going to truly catch bankruptcies," he said. "Where I think the industry risk exists is for those list owners that are not provided with good, solid list owner reporting. If the reporting is solid, it is pretty transparent when you walk through the process."
One in-house list manager saw both sides of the issue.
"My opinion is that 99.999 percent of the brokerage/management community doesn't need to be audited," said Alan Zamchick, list director at Hachette Filipacchi Media U.S., New York.
He is the in-house manager for Hachette's magazine titles including Elle, Elle Décor, Elle Girl, Woman's Day and Metropolitan Home.
"But if you go back to the days of Gil Greenfield and his collapse, which was mishandled, there is probably still a fragment of the industry that could benefit from something like this." Zamchick said.
Greenfield Direct Response folded in the early 1990s.
However, Zamchick pointed out that the list industry has a long-standing tradition of trust between brokers, managers and clients.
"The industry for a long time has been built on honesty," he said. "And if you feel the need to bring in an auditor, then you're questioning that honesty and I don't think people like that."
However, Zamchick didn't think audits would be a bad thing and cited a cold war-era quote from Ronald Reagan, "Trust but verify."
Ralph Drybrough, CEO of MeritDirect, White Plains, NY, said he has never been asked for an audit by a list owner but has no qualms about granting them, except if it's an issue of separating records from other companies.
"I think it might indicate a deeper problem that a client doesn't trust what we are reporting and remitting and may be indicative of a fracture in the relationship," Drybrough said.
Drybrough said of Palmer, "Dave was controller of MeritDirect from our start in early 2000 and his leadership of our accounting and financial activities made a genuine contribution to our rapid growth. We're happy he is staying in the industry and wish him luck in his new venture."