Do You Need a Royalty Audit?

For those in the entertainment industry, the music, films, books, video games or apps they create is the representation of their personal creative efforts – even though they often don’t take a “physical” form. These individuals typically rely on producers and distributors to share their work with the masses in exchange for a deferred “salary” in the form of royalty payments. The revenue stream from the value of an artist’s intellectual property can be significant, but it’s sometimes unclear whether they are being paid what was promised. An audit of royalty statements and payments can correct underpayment or even misuse of intellectual property. To help our clients, prospects and others in creative industries, Wilson Lewis has provided the key factors for those considering a royalty audit.

Royalties Explained

Those with intellectual property rights (i.e., musicians and other entertainers) license the right to production and distribution companies (licensees) to sell and distribute that property. In exchange, royalty payments are due to the licensor as specified in their contract. That contract will also specify when, where and how the licensee can use the property and provide methods for determining what payments are due to the artist.

What Is a Royalty Audit?

A royalty audit consists of having a qualified expert review the royalty agreements and financial statements to ascertain what was actually agreed to and whether or not the licensee is compliant with all financial terms of the agreement. An audit ensures that sales are accurately reported, deductions on royalty statements are appropriate and that royalty payments are calculated, reported and paid completely and accurately. The goal is to quantify and recover any underpayments. Typically the licensor will engage the auditor, but the licensee might also request an audit as a way to assure the artist about their accounting practices.

An audit can provide everyone involved peace of mind – even if no issues are found. If there are problems, it can result in increased revenue due to the licensor, resolve issues or potential issues before they become material, provide better brand and intellectual property protection, improve contract language, enhance future compliance and improve transparency in the relationship.

While most companies welcome the opportunity to make any discrepancies right with an artist, a royalty audit can also support litigation if that becomes necessary.

When Is an Audit Necessary?

A royalty audit is certainly needed when there are concerns , but periodic review may also prove beneficial. Even if nothing is amiss, the licensee is less likely to underreport royalties if the risk of a future audit exists. Underpayments of royalty amounts may stem from a variety of reasons, including ineffective or inaccurate systems, processes and controls, human error, personnel turnover, contractual misinterpretations and even intentional underreporting or fraudulent accounting practices.

Some of the reasons a royalty audit may be warranted include:

• Unusual entries on the royalty statement
• New or excessive deductions
• New or changing markets
• Expiring audit or tolling rights
• Significant change taking place with a licensee (e.g., a merger, change in leadership or lawsuit)
• The possibility of miscalculated foreign exchange rates
• The need to increase compliance overall by sending a “message” to other licensees

Contact Us

It is much better to find out whether there is a problem with royalty payments before the situation is beyond repair. Along with providing the necessary level of expertise, an experienced royalty auditor can also act as a go-between so that the relationship between artist and licensee can be better preserved. If you have questions about royalty audits or need other assistance, Wilson Lewis can help. For additional information, call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.