The recording industry has massive stakeholders – from songwriters to artists to a multitude of businesses, which are involved in the distribution process. And it’s an industry that can ignite media attention when some lyrics sound too much like another song; when this happens, it triggers headline-making legal battles. Understandably, people want to protect what’s rightfully theirs. Early in the contract negotiation process, licensing agreements are typically ironed out, stating the royalty percentages and the frequency of payments. Yet in these highly complex legal documents, boundary lines are often blurred. On the flip side, they may be ignored completely.
Licensing agreements between a licensor and licensee aren’t limited to only the entertainment realm; a vast array of other industries also has them in place to protect their intellectual property. For example, when authors sign a contract with publishing companies, they normally add clauses that stipulate the royalties they will receive on book sales. The mining industry, as well as the oil and gas industries, are bound contractually to pay landowners for resources extracted from their property. Fashion and Life Sciences also leverage royalty agreements to benefit financially. Royalties that stem from these agreements can often provide a lucrative revenue stream. However, many license holders are either not aware of their rights or fail to take advantage of them.
What is a Royalty Audit?
Under the licensing agreements, individuals, businesses, or entities determine the licensee’s parameters; as the owner, they stipulate the frequency of the IP’s use, its format, and its method of delivery. Additionally, the agreement includes the specifics that outline the royalty amount due to the licensor.
To ensure that the licensor is accurately compensated, an independent non-biased Royalty Audit, or risk assessment, is critical. This is especially true when there are multiple licensees. An audit is an ideal monitoring method that will maximize income and protect your intellectual property.
When experts perform a financial inspection – a Royalty Audit – they normally identify risks and potential problems. During this multi-dimensional examination, auditors will verify if the licensee is adhering to the license agreement. Additionally, a royalty audit is a prime time to identify inconsistencies and spot unusual entries.
What is License Compliance?
During a Royalty Audit, massive amounts of data will be extracted, sorted, and analyzed. By crunching the data, the auditors will be able to determine if the licensee is actually complying with the terms of the agreement. The examination will serve to ensure there is no underpayment or underreporting. Further, it will confirm whether or not the licensee is adhering to or deviating from the stipulations. One facet of compliance is to ensure the licensee is not selling the asset/IP to another entity.
Why is it important to conduct an audit or have a ‘right to audit’ clause?
While the scope and complexity of a license agreement can be overwhelming, it doesn’t mean safeguards shouldn’t be implemented. One such safety net is the ‘right to audit’ clause. This allows the licensor the right to examine the accounting system to confirm proper royalty payments have been made – as agreed. When it comes to money, the honor system is not a good business strategy. Occasionally, payments are skipped, and this may be unintentional. Regrettably, however, there are a few licensees who will intentionally submit incorrect royalty payments.
What are some of the benefits for both the Licensor and Licensee?
Taking a look under the hood – or commissioning a royalty audit – is a smart business decision. When you collaborate with other businesses, individuals, or entities, an audit can be fertile ground for brand enhancement. Thus, a royalty audit can ensure there are no holes in the dam that will cause irreparable damage to the brand or business relationship.
Take a look at a few valid reasons why a Royalty Audit can be advantageous to both parties:
- Build trust
- Maintain integrity
- Improve transparency
- Eliminate worry, doubt, and confusion
- Ensure there are no human errors by either party
- Keep lines of communication open
- Collaborate to determine if changes are necessary
- Make necessary updates and calculations
Making an investment in a royalty audit can potentially open up a wider revenue stream. We have a team of experts who have been helping clients recover lost or underreported revenue for years.
Contact us to get started.
Latest posts by Ashwini Vasudeva (see all)
- New Section 174 Mandatory Capitalization Regime - May 4, 2023
- Employee Retention Tax Credit (ERTC): The Interplay of ERTC, PPP, and R&D Tax Credits - February 28, 2023
- Employee Retention Tax Credit for Start-ups and Other Challenging Circumstances - February 3, 2023