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Royalty Audit ServicesData Rate Utilization (DRU) is a technique which RCO has perfected over the past ten years. We acquire the licensee output in digital (data) formats, Excel spreadsheets or in hard copy formats then convert the data into a consistent, understandable format. Our team has extensive experience in converting files from paper and Excel into refined, consistent data files. DRU then allows us to perform a “completeness” test against the actual results using the actual contract terms to produce an authentic, objective analysis of royalty income. The end result from DRU confirms higher audit claims since 100% of the reported data is analyzed. These figures stand-up better during settlements and also help the licensee identify weaknesses in their internal processes. Royalty Compliance Auditing in the License Industry Royalty auditing in the licensing industry is designed to establish the degree to which a user of protected creative property rights has fulfilled the legal obligation to compensate the rights owner for such use as was originally defined by contract. This is usually accomplished through reviewing, investigating, and examining the books and records of a license to determine if the reportings rendered by the license are in compliance with the various provisions and requirements of the contract between the two parties. The audit will include various procedures reflecting the terms of the agreement, applied to the royalty accounting records of the users. The results are then reported to the rights owner for use in resolving any issues of non-compliance. The royalty audit should provide solutions to royalty compliance and collection issues, solve problems and clarify contractual issues, add to the bottom line and provide valuable industry insight toward building stronger business relationships between the parties. The licensor may want procedures performed to provide comfort that their copyrighted product is only being exploited under the terms, conditions and methods as provided in the contract and as intended by the licensor. Therefore, the scope of royalty auditing may be expanded to include a study of the business practices of the licensee, verification of quality control, and copyright protection. Royalty audits may also be used to provide valuable insight into the business practices of both parties. Quite often licenses are negotiated and executed without either party having a full understanding of the accounting requirements. In fact, many licensees are ill equipped to fulfill the accounting and auditing provisions of the contract. Royalty audits are often used for the purpose of educating both parties as to their obligations in providing information to facilitate accurate and complete accountings. If communication is the issue, the terms and requirements may be clarified. If the problem lies within the accounting system, recommendation may be made to obtain a royalty system from a service provider or to obtain consulting services to build internal capabilities. Finally, either party may use a royalty audit as a source of data to prepare a valuation for mergers, or buy / sell transactions. In the licensing world, there has always been a tug of war as to who has the power. Does the licensor need the licensee more to distribute their product or does the licensee need the licensor to provide product for distribution. Usually, neither the licensor nor the licensee will want to offend the other party. Although auditing is usually considered an adversarial function. The company being audited may think of the audit as an invasion of privacy and a disruption of their business. The company requesting the audit may believe they have been cheated and substantially underpaid. If the auditor is an adversary or if the sole purpose of conducting an audit is to recover unpaid royalties then you should consider changing auditors and reconsider the scope of the audit. The very mention of the word audit gives rise to many questions: 1. What is an audit? 2. How will the audit affect the relationship between the licensor and the licensee? 3. What are some of the other benefits of auditing? 4. What does an audit cost? 5. How is and audit conducted? / What procedures are involved? 6. What are some of the issues that may arise in an audit? 7. What authority provides audit rights? 8. What records should be made available? / What records should not? 9. How is an auditor chosen? 10. How is it determined if an audit is warranted? 11. How are any issues discovered during the audit resolved? These questions are answered in the following chapter pages .... Click- To continue reading the entire paper by Wayne C. Coleman, CPA.
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