Frequently Asked Questions
Why should I audit?
Very often we hear the following type of comment regarding audit; “We trust our licensees, so we don’t really need to audit.” In fact it is very seldom that audit findings are the result of a deliberate misstatement. Most issues that arise during an audit are either accounting errors or contractual interpretation. These can be very significant amounts over the course of a license period. A well implemented audit program improves not only royalty cash flows, but can also enhance and improve the relationship with the licensees.
What’s in an audit report?
The report is customized to the individual needs of the licensor. The basic elements of a report include a text and supporting schedules. The text will state the audit period, the agreements included in the procedures, a brief listing of the procedures performed and a description and explanation of each of the claim areas. The supporting schedules for each claim show the detailed calculations.
Who pays for an audit?
Most agreements have a clause that provides for the licensee to bear the cost of the examination if certain thresholds are exceeded. The threshold is generally based on a percentage of previously reported royalties, in most cases it ranges from 3% – 5%. Quite often the findings exceed the audit threshold and a claim for the fees and expenses is included in the total amount due as shown in the audit report.
Is this process adversarial?
We understand that your relationship with your licensees is very important and that you have invested a great deal of time and effort in those relationships. We make it a point to be as non-adversarial as possible throughout the entire audit process. We take time to explain to licensees that audit is normal course of business and not any kind of personal affront. We also firmly believe in educating licensees so that they have a better understanding of how to be in compliance and accountable to the terms of the agreement.
We have a small licensing program, is it practical for us to audit?
Yes, it can be practical for you to audit and should be considered normal course of business regardless of the size of your program. We can customize procedures and fees to accommodate any size program. One of the ways we can do this is to “piggy-back” audits, including more than one licensor in fieldwork at a given licensee. This is an effective and efficient way to maximize the benefits of auditing and to minimize the expenses.