How can you determine the scope of a royalty audit?

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If you are a music artist, producer, songwriter, or publisher, you may have the right to receive royalties from various sources, such as record labels, streaming platforms, performance rights organizations, and synchronization deals. However, how can you be sure that you are getting paid fairly and accurately for your work? One way to verify your royalty income is to conduct a royalty audit, which is a process of examining the accounting records and contracts of the entities that owe you royalties. A royalty audit can help you identify and recover any underpayments, errors, or breaches of contract that may affect your royalty earnings. In this article, we will explain how you can determine the scope of a royalty audit, which is the extent and depth of the audit that you need to perform.

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Mangaliso Mthembu

Attorney @ Ncube Inc. Attorneys | Music Rights Management, Litigation
Sibusiso Mnyanda

Author | Broadcast | History | Music Publishing
Cedar Boschan

Forensic Accountant & Expert Witness ?? Damages, Royalties, Audits & Valuation

1 Why scope matters

The scope of a royalty audit is important because it affects the cost, duration, and outcome of the audit. A broader scope means that you will cover more sources, periods, territories, and types of royalties in your audit, but it also means that you will incur higher fees, spend more time, and face more challenges in obtaining and analyzing the data. A narrower scope means that you will focus on specific areas of concern or interest in your audit, but it also means that you may miss some potential issues or opportunities in other areas. Therefore, you need to balance the benefits and risks of different scope options and choose the one that best suits your goals and budget.

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Mangaliso Mthembu

Attorney @ Ncube Inc. Attorneys | Music Rights Management, Litigation
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One thing found useful is to concentrate on the sources that are recoverable. Not all uses of musical work area recoverable for example some territories may report usage but collection rates are low. Also a wide scope can also give valuable data as to where musical works are used, which may not result in immediate royalties but can influence your marketing and touring strategy. It can also validate other data set that's you have.

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Sibusiso Mnyanda

Author | Broadcast | History | Music Publishing
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In my experience the primary and most important step to cover when verifying royalty income is that you, as the creator/IP owner of said musical works, has done all necessary due diligence to complete proper administrative measure in submitting correct notification of works to the various relevant collective management organizations that collect the various possible sources in indifferent territories over certain periods. If one is under management or in contract with managers or record labels, one needs to make sure they understand the percentage splits of their ownership rights in works that they are involved in creating and are then notified by the third party on their behalf.

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Zebulon Chandler

Atlanta Entertainment Attorney #atlentlaw
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In my experience, audit focus is more important than breadth. Scope was traditionally determined by the size of the expected discrepancy but more recently which income sources are affected or unreported play a bigger role. The general concept that a large potential misappropriation demands a larger audit is still true, but often good investigation into the public record prior to an audit can determine unreported income streams. This is often the best place to start, as a reveal of hidden unreported sources in a relatively small audit can create the entry point, basis, and foundations for a larger scope audit.

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2 How to define scope

When defining the scope of a royalty audit, there is no single formula to follow as it depends on various factors. However, some general steps can be taken to determine the scope. Start by reviewing your contracts and agreements to understand your audit rights, obligations, and limitations. Then analyze your royalty statements and compare them with expectations, benchmarks, and industry standards. Identify any discrepancies or anomalies that may indicate underpayments or errors. After that, prioritize the sources, periods, territories, and types of royalties that have the highest potential for recovery or improvement. Finally, consult with a professional royalty auditor who has the expertise to conduct the audit. A royalty auditor can help you assess the feasibility and profitability of the audit, negotiate terms with entities that owe you royalties, perform the audit and report findings and recommendations.

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3 What to expect

Once you have determined the scope of a royalty audit, the auditor will send a notice of audit to the entities that owe you royalties, informing them of the scope, date, and location of the audit. The entities will respond to the notice, either agreeing or disagreeing with the scope and providing or denying access to records and documents. If there is any disagreement, the parties will try to resolve it through negotiation, mediation, arbitration, or litigation. The auditor will conduct the audit on-site or remotely depending on the scope and access to documents. They will examine, verify, and reconcile accounting records and contracts of the entities that owe you royalties as well as compare them with royalty statements. Afterward, they will prepare and deliver an audit report that summarizes findings and quantifies any underpayments or errors that may affect your earnings. Lastly, you will review the report and decide whether to accept, reject, or negotiate its findings as well as pursue any recovery or improvement actions. If there is any dispute, it can be resolved through negotiation, mediation, arbitration, or litigation.

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Cedar Boschan

Forensic Accountant & Expert Witness ?? Damages, Royalties, Audits & Valuation
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Although we often send audit notices on behalf of clients as the text contemplates, often legal counsel issues the notice instead, especially when it accompanies a request for a tolling agreement. The best practice either way is for the attorney and the auditor to collaborate on both audit and objection notices.

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4 How to benefit

A royalty audit can be highly beneficial to you in many ways. Recovering any underpayments, errors, or breaches of contract can be done through voluntary payments, settlements, or judgments. Your royalty income can also be improved by renegotiating contracts, adjusting royalty rates, or optimizing royalty allocations or classifications. Furthermore, this audit can help enhance your royalty management by updating records, streamlining processes, or implementing best practices. Lastly, it can help strengthen your royalty relationships by clarifying expectations, resolving disputes, and building trust and cooperation.

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5 How to prepare

A royalty audit can be a complex process, so it's important to prepare yourself and your team. Gather and organize contracts, agreements, royalty statements, and other relevant records. Identify and communicate your goals, expectations, and concerns for the audit. Make sure to choose a reputable and qualified royalty auditor who can represent your interests. Be ready to act on the audit report and follow up on any recovery or improvement actions. Be proactive, assertive, and flexible in pursuing your desired outcomes. By taking the right steps to prepare for a royalty audit, you can ensure that you get the best possible results.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Mangaliso Mthembu

Attorney @ Ncube Inc. Attorneys | Music Rights Management, Litigation
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Royalty audit can help it deciding in which entities are best placed to collect your Royalties. It is important to assess which entities you appoint to collect different Royalties in various territories. The audit should also make suggestions as trends in the market.

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How can you determine the scope of a royalty audit?

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1 Why scope matters

2 How to define scope

3 What to expect

4 How to benefit

5 How to prepare

6 Here’s what else to consider

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