Get To Know Royalty Audits in the Music Industry
Royalty audit is a process to check whether the licensor gets the appropriate amount of payment from the licensee in accordance with the agreement at the beginning of the use of the patent or license. One of the industries that uses this audit is the music industry with the aim of providing details to songwriters, artists, and labels on how their work is represented in public and subsequently, who is collecting revenue as a result of their exploitation.
Any company involved in a license or patent agreement (especially songwriters in the music industry) can be audited or request a royalty audit. Some of the reasons why they need a royalty audit are to get the income money that should be given by the licensee, take time to encourage the licensee to pay appropriately, and determine whether the licensee is paying correctly. A licensor could undertake royalty audits of their licensees with an internal group, but most royalty audits are performed by an outside audit firm with this specific experience. The licensee and licensor benefit from having an unbiased third party execute the audit. The audits usually entail managing massive amounts of data and performing analytics on it.
There are several reasons why royalty audit is important in the music industry. Firstly, because the auditing process would give assurance to the licensor that they are being paid correctly by the licensee. Besides that, these days most music labels make royalty audits a standard business practice in their company. With royalty audit, the licensor could check whether the calculated exploit is in accordance with the agreement in the beginning. The licensor could also verify whether any exploitation (usually in the form of songs by the songwriter) has been paid for or not. In the music industry, royalty statements can be complex, so the royalty auditor could help licensor and licensee with their royalty statement so none of them will get disadvantages from any mistakes.
There are many different reasons why royalties are reported incorrectly, whether intentional or not by licensees. The example of a royalty error case reported by the licensor are for example when there is a lack of reporting of income derived from the intentional sale of songs by licensees in an effort to pay less. The royalty audit could also prevent an unintentional error by the licensee while preparing reporting to the licensor. Besides that, they could also fix the misunderstanding of what is stated in the license agreement between the licensee and the licensor. In some companies, new products that are subject to royalties are not included in the reporting (either intentionally or unintentionally). A royalty audit could help the company fix their problems that are caused by the mistakes. In other cases, when there are product/SKU number changes and then the person preparing the royalty report doesn't know this, they tend to leave them out of reporting. Therefore the use of royalty audit in the music industry is important in order to avoid such mistakes in the upcoming report in the industries.