Royalty Audit and Participation Audit FAQ
What is a royalty audit?
A royalty audit is an audit of a licensee to determine if the licensee is paying the proper amount of royalties or participations and complying with relevant provisions of an agreement. Royalty audits, also referred to as participation audits or compliance examinations, involve reviewing the books and records of licensees such as record companies, movie studios, or any other entities contractually liable to pay royalties or participations. Often the licensees, for various reasons, fail to pay the licensor their contractual share, so the licensor hires an audit firm to conduct a royalty audit to determine the unpaid royalty or participation amounts. The audits often uncover unpaid royalties and participations caused by undiscovered payment errors.
Example 1: A recording artist or music publisher may conduct a royalty audit of their record label to make sure the record label is paying the correct amount pursuant to the recording agreement and/or mechanical licenses issued to the label.
Example 2: An A-list actor that is entitled to a percentage of “Gross Receipts” may audit a studio to determine whether the studio is correctly reporting and calculating their participation amounts.
When should you perform a royalty audit?
It’s a good idea to audit routinely because usually an audit uncovers more money than the cost of conducting the audit. Even if it isn’t the intent of the licensee to underpay the licensor, it happens regularly, but can go undetected unless you conduct an audit. Too many licensors think about auditing after it’s too late—after the audit window provided in the agreement has closed. There is typically a two to four year window and you may only be able to conduct the audit during that period.
What types of reporting errors do you typically find?
Please see: Sample Royalty Audit Recoveries and Issues - Music