#14 Sarbanes-Oxley and Trade Promotion Management Best Practices

Risks of Trade Promotion Non-Compliance With SOX

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 CPG companies, it requires monitoring, not only for return on investment, but also for compliance with the laws. Because of the complexity of trade deals, 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:

1. Inaccurate allocation of promotion expenses by product.
2. Inability to measure trade promotion effectiveness.
3. Vulnerability to erroneous customer deductions.
4. Potential violations of the Robinson-Patman Act of 1936 regarding price discrimination.

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; andA statement that its auditor has issued an attestation report on management’s assessment

Trade Promotion Management Best Practices

The types of trade deals include Price Discounts,Coupons, Rebates, Volume discounts, Slotting, shelf-position ,Co-op advertising, catalogs, In-store displays , Product Sampling Staff incentives, and gifting.

Trade Promotion Settlement

There are four ways in which the retailer gets compensated for the promotion deal.??

• Off-Invoice is the cleanest, as the incentive shows on the invoice, so there should not be double deduction surprises. However, if the retailer does not adjust its system for product cost, the consumer may not get the savings, in which case the manufacturer will not get the expected sales lift. Returns must be reconciled so that the deal price is credited.
• Net Bill?is also a clean way as the customer sees only the net reduced price on the invoice, but it could be missed and later result in a deduction for the same allowance.
• Rebates are credits issued after the retailer has submitted proof of performance which, like Billbacks, require a good TPMS to track effectively.
• Billbacks?are trade promotions settled by a customer chargeback (debit memo) deducted from a payment usually not related to the original invoice. Billbacks cause most problems for the manufacturer because of retailer charging errors and the complexity of reconciling them to the deals.

7 Best Practices to Consider

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.

1. 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 justify the money for an integrated TPM-Deduction system can license a powerful hosted application that works over the web.
2. Simplify Deal Formats: Ambiguous terms lead to misinterpretation and costly deduction errors. Ensure deals are clear, concise, and tested internally before sharing with brokers and customers—especially given the volume of supplier formats retailers juggle.
3. Oversee Brokers: Brokers can streamline deal execution, but compliance and profit accountability remain your burden. Regular audits of broker performance are non-negotiable, despite their professionalism, as their loyalty often leans toward the customer.
4. Limit Open Checkbooks: Untracked, discretionary spending by sales reps invites SOX scrutiny. Tighten controls and validation processes.
5. Strengthen Documentation: SOX demands thorough records. Use this to verify promotion execution aligns with plans, turning compliance into a competitive edge.
6. Challenge Erroneous Deductions: Approving mismatched claims may avoid short-term friction but risks long-term SOX issues. Reject and pursue non-compliant deductions systematically.
7. Adopt Cutting-Edge Deduction Management: With 10-20% of deductions invalid or excessive, a state-of-the-art system—ideally AI-enhanced—streamlines recovery and ensures compliance.

Request a Free Deduction Overview Leak Assessment at https://www.smyyth.com/arpartner/