During the past few years, newspapers and magazines have devoted millions of column inches to the shenanigans and suspect accounting of various corporate malefactors. But comparatively little attention has been paid to allegations of financial impropriety leveled at one segment of the business world: media companies. The press has had little to say about the question whether some newspapers and magazines are routinely overcharging advertisers by goosing circulation numbers, a form of fraud.
The issue surfaced most notoriously earlier this year during the food fight between the ex-talk show host Rosie O’Donnell and the publishing giant Gruner+Jahr, following the demise of Rosie magazine. During the course of dueling $100 million lawsuits for control of Rosie, Diane Potter, G+J’s circulation manager, testified that she had inflated circulation numbers to the Audit Bureau of Circulations (ABC), the group charged with policing circulation for newspapers and magazines. It was also revealed that another G+J title, YM, had similarly inflated circulation numbers. Given the general notion that circulation figures are padded by steep discounting and bulk distribution, the dismay that greeted the Rosie revelation had something of a Casablanca air to it ("we’re shocked, shocked . . ."). Still, Folio, Advertising Age, and other trade outlets have reported that advertisers have seized upon the Rosie scandal to begin beating up on publishers about their rate bases.
Advertisers got some additional ammunition from a messy denouement to the Rosie scandal. In March, Daniel Brewster, deposed ceo of G+J USA Publishing, filed suit against the company, saying it had disparaged him in the press in violation of his employment agreement. After the cross-suits were tossed out of court, G+J dropped the hammer on Brewster. The stated reason for his ouster was negligence in supervising Rosie’s circulation estimates to ABC. But Brewster maintains that a report commissioned by G+J from Magellan Media Consulting Partners shows that the problem was not his management but the slipshod standards for reporting circulation numbers in the magazine industry. In fact, Brewster’s suit alleges, the Magellan Report found that "any problems in the Rosie circulation figures were, if anything, less serious than those common to other publications."
I asked Yvette Miller, general counsel to G+J USA, if I could see the Magellan Report. She agreed and faxed over a two-page document. In it Magellan says that of ninety-seven magazines G+J put out in 2002, ABC audits found that the circulation of sixteen varied 2 percent or more (the report doesn’t say exactly how much more) from what had been reported to ABC. Rosie and YM accounted for nine of those instances. Magellan attributed the inflated estimates principally to a "decentralized management structure and the absence of checks and balances within the company’s ABC reporting process." Concerns over advertising, the report delicately concludes, had "undue influence" over circulation reporting.
This finding would certainly seem to put Brewster in the crosshairs, but that’s not all there is to the story. Miller is careful to say that what she sent me is "the final report" by Magellan, which contains its summary findings and recommendations. Brewster’s suit refers instead to the "first draft of the report" submitted to G+J in January, which he claims "largely exonerated" him. "I’m sure there were preliminary drafts," Miller told me. "But what I gave you is the report." That two-page document says Magellan interviewed more than forty people inside the company, and analyzed internal data from G+J, the Magazine Publishers of America, and the ABC. Two pages seems pretty thin gruel for all that work.
G+J isn’t the only big media name to be accused recently of cooking the books. In February the Securities and Exchange Commission opened an inquiry into the circulation practices of Long Island’s Newsday. The inquiry came in the wake of a $100 million class-action lawsuit filed by advertisers alleging that the Tribune Company newspaper improperly boosted circulation by getting distributors to dump unsold copies of Newsday and its sister publication, the Spanish-language Hoy. Newsday’s publisher, Raymond Jansen, didn’t want to comment for this article, but a company spokesman faxed a prepared statement saying in part that the suit was "completely without merit" and involved less than 1 percent of the paper’s total circulation and less than 15 percent of Hoy’s total circulation. The statement also notes that ABC approved the circulation numbers for both publications during the period covered by the lawsuit.
John Payne, a senior vice president at the ABC, says it’s important to keep in mind that the Newsday accusations are just that – accusations. He notes that with G+J, the annual ABC audit revealed the circulation discrepancy, information that was then distributed to ABC members. "We don’t just sit back and accept affidavits," Payne says. "We go out and kick the tires and ask questions." Sometimes this involves ABC auditors tailing a newspaper distributor’s trucks or monitoring paper hawkers. In general, Payne says that magazines and newspapers are honest, but he admits that uncovering intentional manipulation can be challenging. "Like any other fraud it may be successful, but we catch it more than you might think." Of course, with subscription and newsstand sales both stuck in the horse latitudes, the temptation to "manage" circulation the same way Enron "managed" earnings remains great.
