Publishing royalty audit – case study

We were asked by a global entertainment company to perform a royalty audit of a major international publishing company as part of a wider annual audit royalty programme. The purpose of the audit was to ensure compliance with the terms of the licence agreement and to identify any underpayments of royalty income. The scope of the audit covered one property over a period going back two years.   Our investigation was designed to confirm the licensee has complied with every clause/obligation in the license agreements. The tests we perform are dependent on each Licence Agreement but in this case included;
  1. work to confirm the completeness and accuracy of the sales value and volume of licensed products which were previously reported to the licensor,
  2. checks were made to ensure discounts to customers and sales returns were correctly treated in line with each Agreement,
  3. identification of any sales made outside the respective Agreement, and
  4. checks were made to confirm any non-financial clauses, such as those relating to advertising spend, product approval for example, were adhered to.
Our audit procedures identified additional royalties of £202,000 due to the licensor, which in this case amounted to 27 per cent of the royalties actually reported by the licensee. Our report summarised these findings in detail as well as highlighting commercial issues identified as part of the audit, which were relevant for future contractual negotiations and the ongoing licensing relationship, and presented negotiating strategy options which were helpful for the subsequent commercial settlement agreement between both licensor and license.

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