Undertaking a royalty or licensing audit can identify any significant royalties not timely reported to the licensor. Some of the strongest reasons to perform an audit include obtaining all royalties which you are entitled to, inducing future compliance, determining any non-compliances, and determining whether an existing license agreement needs to be modified, adjusted or terminated.

What are royalty or licensing audits?

A royalty or licensing audit, in its simplest form, is a financial inspection that determines whether a licensee is paying the licensor the correct amount of royalty fees. An agreement has been entered into that clearly defines the royalties to be paid out and the terms or conditions associated with said agreement. Industries such technology, franchises, music, software and merchandising may require licensing audits. When an audit is requested, the cost can become extreme so there is a need to determine who will be responsible for paying the audit costs. In most agreements, underreporting defined above a determined threshold will lead to the licensee paying the audit costs.

Import of hiring an Accounting Firm

Hiring an accounting firm with staff experienced to undertake licensing audits will help businesses ensuring that they fully understand the impact of any license agreements, implications of complying or non-compliance, etc. They will work with a business to address their knowledge and understanding to ensure there is no unexplained underreporting of what is owed, that there aren’t any misunderstandings associated with what is covered by the technology being licensed, that clerical errors are avoided, that any transactions that do not reflect market conditions are reported, that incorrect used of exchange rates in international transactions are caught, etc. Finding these errors can work for or against a company. It may show that there are outstanding royalties due or it may show that a company who owns a license may not be receiving their full dues.

The licensing of assets, such as trademarks, proprietary processes, copyrights and other intellectual property, have become a dominant source of revenue and potential expense for many businesses. Relationships are forged through strong licensing agreements; however, said agreements require consistent and periodic review to verify that licensees adhere to contractual terms and licensors receive accurate payments. These agreements can be extremely challenging to understand due to all the nuances and therefore it is strongly advised that a small business hire a firm who can assist in licensing audits. Firms such as Miller Kaplan can conduct royalty and licensing audits for both individuals and companies, having experience in conducting licensing audits for products and industry areas such as film and television, theater, automotive, sports and technology.

In addition to addressing royalty issues, licensing audits, if done properly, can be undertaken to avoid disruption by ensuring a team is put in place that will address the whole audit planning, focusing on communication throughout the whole process, streamlining the investigation and keeping a close eye on the budget. Many organizations have staff members that are trained to know how to focus an investigation regardless of the mounds of data and the nuances of the licensing audit.