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Royalty Auditing Essay

1565 words - 7 pages

Introduction
According to Merriam-Webster, the definition of an audit is “a methodical examination and review” (Merriam-Webster). Throughout this whole semester, our class discussions have been about the audit practice and the process of auditing companies’ financial statements. There are many other instances where an audit is necessary to produce opinions, outcomes, and conclusions. The music industry consists of different segments where an audit is needed to make sure everyone is getting what they are entitled to whether it is the artist, songwriter, or the producer. I will discuss the roles of a royalty auditor and the process they go through during their audits. I will also point out ...view middle of the document...

Synchronization rights and royalties are needed for a song to be reproduced on a television show, movie, or commercial. Lastly, print rights and royalties are paid to songwriters and publishers based on sales from printed sheet music (Obringer). Keeping track of who gets what royalties and how much is the responsibility of performing rights organizations (PRO). The main PRO’s in the United States are The American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) (Obringer). They have different methods of capturing the data about where and how each song was played or performed.
Royalty Auditing
Most license agreements have an explicit or implied audit right, yet many companies, artists, songwriters, and such do nothing to ensure they are receiving the full amount to which they are entitled. A royalty audit is when the licensee’s books and records are examined and inspected to ensure that they paid the licensor the correct amount they owed. Usually the licensor hires a royalty auditor that is usually a certified public accountant, lawyer, or business advisor whom averages a salary of $70,000/year (Simply Hired). Different small accounting firms offer artist royalty services, some usually under its forensic practice. Other accounting firms offer royalty services under its tax practice because some audits are done solely for tax purposes.
The auditor examines sales figures, accounting practices, royalty rates, and other data of record labels, music publishers, film and related distributors (H&H Music Group). Royalty audits are expensive and can cost up to $30,000. One advantage of royalty audits is that the findings of excess royalties outweigh the cost of the audit. In most license agreements, if the auditor identifies additional royalties with a threshold between 2% -5% of what was initially reported, the licensee pays the cost of the audit (Throckmorton).

When an audit is done thoroughly some of the findings include:
* Incorrect royalty rates
* Excess free goods
* Returns improperly allocated to free goods
* Understated foreign retail price or uplift
* Unreported music video license fees
* Incorrect tax computations
* Unreported excess free goods for record clubs
* Invalid producer-based advance deductions
* Overstated video production and recording costs
* Overstated promotional expenses
* Improper expense allocations
* Incorrect royalty calculations for club sales
* Underreported and unreported units
* Unlicensed songs
* Excess reserve calculations
(Nigro Karlin Segal & Feldstein, LLP)
A royalty auditor goes through different procedures during an audit. Some of these procedures are:
* They secure and review accounting records for sales data, royalties, prior audit reports, and licensing agreements.
* Verify that administration fees deducted on co-published songs were correctly calculated
* Review of earnings reported...

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