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High kickbacks on carriage fees hurt TV industry: EY M&E Fraud Survey

High kickbacks on carriage fees hurt TV industry: EY M&E Fraud Survey

Author | Collin Furtado | Thursday, Sep 18,2014 8:30 AM

High kickbacks on carriage fees hurt TV industry: EY M&E Fraud Survey

Recently Ernst & Young (EY) released a Media & Entertainment Fraud Survey 2014 report which stated that there was a 56 per cent increase in fraud and corruption in India’s media and entertainment (M&E) industry during the last two years. The report said that one in six respondents had reported increasing instances of fraud in their organisations. With a sizable share of the frauds affecting the television broadcasting industry, we read the fine print.

High kickbacks hurt broadcasters

One of the key highlights of the report is that 83 per cent of the respondents said that kickbacks were a central concern in the industry when it came to talent-related and acquisition costs, carriage fees, IPR and satellite rights. Carriage fees have been a contentious issue between TV broadcasters and Multi-system Operators (MSOs) and Local Cable Operators (LCOs).

“A large media company had been the victim of carriage fees-related fraud where the strategic placement team members responsible for negotiations were in collusion with carriage vendors to secure kickbacks. There was not any segregation of duties and funds were routed through ‘shell’ companies, which were not even engaged in the cable operation business. Furthermore, some the carriage deal values were substantially higher than those of the company’s peer operators fulfilling similar parameters or criteria. An investigation revealed that kickbacks were in the range of 5 per cent–15 per cent of deals, depending on the nature of relations between the two parties,” said the report.

Commenting on this Mukul Shrivastava, Partner, Fraud Investigation & Dispute Services, EY India said, “We hear people saying that kickbacks exist in the M&E industry because frauds are prevalent. And so everything is overpriced. Another aspect of the industry is that everything is non-standardised. So if you pick anything that is creative or a production or in this sector, the costs will be variable” Shrivastava gave the example of a prop on a set, say a table, which has no standard price. “How much does talent cost? Should I pay a celebrity one crore for an advertisement? Or should I pay him or her two crores for a series in which he or she appears? Or should one pay the celebrity five crores for something else? There is not any standard price, and the only thing into consideration is someone’s judgement. And the moment someone’s judgement is involved, I think the probability of fraud and kickbacks is very high. Which is why people are very malleable when it comes to cost and pricing,” he added.

The report also stated that 78 per cent respondents complained about overbilling and 70 per cent said false invoicing were fundamental concerns in the industry. A majority of 52 per cent respondents believe that losses for the companies range between 5-25 per cent. “While the entire M&E industry is suffering, is the television industry suffering more? Probably yes. This stems from the fact that television is a real-time, everyday production. And from that perspective the industry is probably worse affected,” said Shrivastava.

Another key finding of the report was the high risk of corrupt practices at government touch points. “... the respondents indicated that the risk of facilitation and unethical payments is high in areas where the Government’s approval is required,” said the report. Commenting on this Shrivastava said, “Wherever there is a government touch point, a higher number of respondents agreed that there is a larger risk of fraud or corruption not only within the TV broadcast sector, but the entire M&E industry.”

Is digitisation the answer? 

The entire purpose of digitisation and assigning a unique subscriber identity to every individual was tantamount to move the TV broadcast industry out of the dark, says Shrivastava. “I reckon (digitisation) should have been rolled out much earlier though I am sure many people may not agree because of logistical issues. Even though we have been discussing this for a few years now, the process has been rather slow. Yes it will impact them (TV broadcasters) a lot,” he added.

On September 20, 2013 Telecom Regulatory Authority of India (TRAI) made a few amendments to interconnection regulations applicable for DAS as well as the tariff order. These provisions, the report said, helped to ease concerns of broadcasters regarding MSOs creating artificial scarcity of channel-carrying capacity to justify the unreasonable carriage fees. One of key amendments states that carriage fees are to be transparently declared in RIO of the MSO, uniformly charged and not to be revised upwardly for a minimum of two years.  

Going by its intent, is digitisation the answer to frauds in the television broadcast industry? According to Shirvastava, not entirely. “With digitisation, this stream of frauds - where say 5,000 customers are disclosed but in reality there are 2,00,000 of them - will stop. MSOs, LCOs will have no choice but to disclose all 2,00,000 customers. Channels can demand to be paid for these 2,00,000 customers. Nonetheless, whether they will re-negotiate the rates, we don’t know as digitisation has not been rolled out yet. But will it stop fraudulent practices completely? Definitely not,” he said.

Toothless tigers?

Farokh Balsara, India Media & Entertainment Sector Leader, EY had said in a statement, “As companies in the M&E sector increase in size and move from unorganised to organised operations, the need for proactive fraud prevention has increased. The adoption of an ethical business conduct and sound governance policies will play a crucial role in determining its true success.”

There are quite a few industry bodies in the M&E sector, that have been rendered toothless because of lack of legal structures, bandwidth and executive powers, says Shrivastava. “Unless it is a law, no one follows a rule. Whether it is the AAAI or the ASCI, they were formed because members felt they were being cheated or penalised. The purpose may have been good, but they do not have the bandwidth or the wherewithal to execute some of the decisions,” he opined.

He also emphasised on the need for TV broadcasters and media companies to have audit clauses with their vendors. The only companies that do so be the large multinational organisations that follow international laws and practices. Fraud and corruption acts and enforcing agencies in the US and UK to ensure that the right to audit your vendor is part of any agreement. Furthermore, the company has to ensure that their vendors too have an audit clause for third party vendors so that a chain is formed and everything is accounted for. This, says Shrivastava, could be a means to reduce fraud and corruption in the M&E industry.   

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