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In the record industry, royalty audits are very important.
Royalty audits are undertaken to determine if proper distribution
of royalties has been made by a contractor or licensee. The money
trail in the music business is extensive and often complicated.
Therefore, the audits undertaken to substantiate total income
may also be complex. For example, an artist may audit a record
company, record producer, production company, commercial producer,
mechanical licensee, synchronization licensee, multimedia licensee,
name merchandiser, or foreign licensee. There may also be third-parties
involved such as a record company's record and tape club licensees.
And, if the artist has also written his own material he may also
audit the music publisher and
performance rights society. All
this just to insure that the full payment of royalties has been
received!
The right to audit is defined in the "right to audit"
clause of a particular contract. This clause must be included
in all contracts (where accounting is involved) to enable separate
accountings of the same transactions. For example, with this clause
in all contracts, a record company's accounting of records sold
could be cross-checked with the mechanical rights society's accounting
of records sold. Just the presence of this clause will go a long
way to insure that the proper credits are being made to the licensor's
account. It is possible, however, even with this clause that the
licensee may refuse to allow an inspection of their books. Here,
legal proceedings against the licensee may be necessary to enable
the audit. In an effort to insure the right to audit some licensors
will attempt to add a default clause that states that the contract
can be terminated by the licensor in the event an audit is refused.
Usually audits are not made to substantiate integrity, but rather,
are undertaken because of the complexity of the business transactions
involved. See Cross-links: CONTRACT-RECORDING CONTRACT clause
#39, CONTRACT-SONGWRITER/PUBLISHER CONTRACT clause #29
As can be imagined, it can be very costly to carry out an audit.
Therefore, sometimes it is not even cost effective to follow through
with it.
A CPA's fees usually include an hourly rate plus expenses. The work involved may be extensive. For example, the audit involved to substantiate an artist's royalty statement may include: analyzing the contract(s) involved, reviewing the artist's royalty statements, doing a preliminary estimation of the potential recoupment to determine if an audit will be cost effective, sending written notice to the proper party(s), securing legal access to the proper account(s), analyzing the accounting system, determining if the accounting records do in fact reflect all the special provisions contained in the contract(s), inspecting the accounting records to determine if royalties are owed the artist, submitting a report claim, and collecting the royalties due (which may involve litigation).
See Cross-links: INTERNAL REVENUE SERVICE (IRS), COPYRIGHT
MANAGEMENT COMPANY, TAX AUDIT, TAX LAW, TAX AVOIDANCE-A CLOSER LOOK,
ACCOUNTANT under "Certified Public Accountant," ACCOUNTING
under "Royalty Statement," ROYALTY
under "Artist Royalty."
.
.
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Right to Audit:
A contract clause
that entitles the licensor the right to audit the accounting records
of a licensee in order to confirm whether or not the licensee
is fulfilling the terms of his contract. See Cross-links: AUDIT,
CONTRACT-RECORDING CONTRACT clause #39, CONTRACT-SONGWRITER/PUBLISHER
CONTRACT clause #29.
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