How a Royalty Audit Produces Additional Royalties Without Auditing
Royalty license investigations case study
Once a licensor has committed to mutually agreed-upon procedures designed to determine the propriety of royalty payments (commonly referred to as a "royalty audit", the first step in the process is the audit notification letter, which is sent to the licensee. In many cases, that letter initiates a self-audit by the licensee.
The following is a brief synopsis of our Firm's experience in three such royalty audits and the results thereof:
- Case I: Audit notification letter is sent. The licensee notifies the licensor of a self-audit and the understatement of royalties by approximately $450,000 due to errors in reporting sales. Upon our arrival to conduct the royalty audit, we are notified by the licensee that they have found an additional $250,000 of unpaid royalties due to new products that were developed and not included in the royalty reports. We complete the audit and determine that the licensee owes another $7,500, in addition to the reported amounts.
- Case II: Audit notification letter is sent. Upon arrival at the licensee to conduct the royalty audit, they inform us that they conducted a self-audit and determined that they underpaid royalties in excess of $1,000,000 due to a clerical mathematical error. Upon completion of the royalty audit, we determined that an additional $75,000 of royalties was owed.
- Case III: Audit notification letter is sent. Within 10 days the licensee responds that they have conducted a self-audit and due to clerical errors, an additional $217,000 in royalties is owed.
As you can see from the three cases cited above, the audit notification letter might, in some cases, generate substantial additional royalties. Certainly, the licensor can rationalize not conducting the actual royalty audit fieldwork once the licensee has "come clean" with the additional royalties due. However, as noted above, the conduct of the actual field audit can produce additional royalty revenue, and the cost of the audit is often more than offset by the total royalty recoveries both pre- and post-fieldwork.
To learn more about McGladrey royalty audit services, contact Sidney Rattner at 847.517.7070.