How harmless marketing campaigns hide questionable revenue practices: Behind The Curtain #1

Marketers celebrate big wins, sales hit records, and optimism soars. Two quarters later, a bad performance review shifts the credit elsewhere. Was it a hidden deal between sales manager and CFO or just misaligned recognition?

I'd like to propose manipulation of revenue recognition practices using marketing spends.

When an auditor or analyst questions the unusual spike in revenue amount, management loves to point out on marketing expenditures using the "Correlation Justification".

"The spike in revenue? It is because of the marketing campaign and efforts. Here is the proof."

Auditors review the revenue, and the company shares the full marketing file to prove the transaction was valid and routine. The existence of the marketing program creates documentary evidence that makes the premature revenue recognition appear proper.

The marketing campaign sprang to life overnight. Internal teams and agencies moved fast, fueled by quick approvals from the top. Agencies thought, “Finally, they get it!” Marketers cheered, “We’re nailing this internal pitch game.”

But look closer, there's a sort of "document-trail" being built -- this marketing program or campaign, specifically designed to "support" this transaction, has expenses. It is used to create a paper trail that appears to justify improper revenue recognition. These elements are:

• Marketing materials targeted at the particular client - for example a supermarket or premium perfume retailer that is buying 4 SUV's for a raffle draw.
• Records of marketing meetings, key hand-overs, PR inserts and the rest of the PR schbang.
• Campaign analytics (enter performance marketers who are given their 15 minutes for their 15 weeks of hard work) showing client engagement and special promotional terms offered with newspaper ad buys and all.

Auditors review the revenue, the company presents marketing proof, early revenue recognition is now justified as a part of normal business and management adds:

"Our Q4 marketing campaign was exceptionally successful. We increased marketing spend by 40% this quarter that led to the revenue spike."

But even if the actual revenue came from improper recognition practices, we can now claim the house is clean and spotless, because we bought expensive cleaning supplies, when we've only actually swept the mess under the rug.

Inspired by: Financial Shenanigans, 4th?Edition by Howard M. Schilit.