Why a Royalty Audit is Necessary and How it can Stop Law Suits
Since royalties are a form of financial payment, there has to be safety precautions put in place for all parties. A royalty audit is the best way to make sure everyone is doing their part in the agreement. Below we are going to look at what royalties are legally, how they’re used in business, and what can happen when things go side-ways.
What is a Royalty Audit?
Simply put a royalty audit is an analysis, examination, and evaluation of financial data regarding royalty payments within a licensing agreement.
Royalty Audit: What is a Royalty Payment?
To help understand why a royalty audit is so important, we have to see how a royalty payment comes to be. A royalty is a payment that is kind of like leasing office space, but it is a little more complicated.
Parties Involved in a Royalty Audit – How the Contract Works
An individual owns property – such as a patent, a franchise, natural resource, copyrighted work, etc.
Legally the owner of this property is also known as the licensor. When the licensor licenses this property to another individual they’re called the licensee, and the contract is called a licensing agreement. Which is a legally binding document.
It’s important to note that the licensee usually uses the licensor’s property to generate revenue or other enticing activity. In the majority of cases the royalties are intended to compensate the owner for it’s use, however, both parties benefit from the transaction.
Royalty Audit: Royalty Payment Amounts and Schedules
Usually royalties are paid as a percentage of revenue that the licensee makes by using the licensor’s property, however, it is also often used in a situation where an inventor, or owner decides to sell their property to a third-party in exchange for paid royalties from revenue the property will make in the future.
When Royalties Aren’t Audited
You’ve probably heard about law suits involving the music industry and unpaid royalties. Many a musician has been allegedly cheated by their managers and record companies who have pocketed money they were owed. What happened to Sly Stone and others shows how complicated lawsuits can become.
However, they can also go the other way, such as the $7 million law suit against Stevie Wonder by his diseased lawyer’s wife. She claims her late husband was promised 6% royalties from Wonder in perpetuity (eternity), and before her husband died she claims her husband bequeathed those rights to her.
Benefits of Licensing and Royalty Audits
For an efficient royalty audit to be carried out, the licensee-licensor relationship also has to be audited. To do this, a good CPA firm uses a thorough process to cross-reference the license agreement terms with royalty accountings to identify any and all discrepancies, such as unpaid royalties.
A Regular Royalty Audit can Thwart Future Litigation
As you can see, a royalty audit is necessary with license agreements. The licensee can rest assured that they’re being paid all the royalties they’re owed; and licensors don’t have to dread being involved in royalty law suits because a payment was missed.
Miller Kaplan Arase LLP works with corporates across the United States to provide multinational companies and mom-and-pop operations alike with cost-effective royalty audit and other financial services.
What is a Royalty Audit?
Simply put a royalty audit is an analysis, examination, and evaluation of financial data regarding royalty payments within a licensing agreement.
Royalty Audit: What is a Royalty Payment?
To help understand why a royalty audit is so important, we have to see how a royalty payment comes to be. A royalty is a payment that is kind of like leasing office space, but it is a little more complicated.
Parties Involved in a Royalty Audit – How the Contract Works
An individual owns property – such as a patent, a franchise, natural resource, copyrighted work, etc.
Legally the owner of this property is also known as the licensor. When the licensor licenses this property to another individual they’re called the licensee, and the contract is called a licensing agreement. Which is a legally binding document.
It’s important to note that the licensee usually uses the licensor’s property to generate revenue or other enticing activity. In the majority of cases the royalties are intended to compensate the owner for it’s use, however, both parties benefit from the transaction.
Royalty Audit: Royalty Payment Amounts and Schedules
Usually royalties are paid as a percentage of revenue that the licensee makes by using the licensor’s property, however, it is also often used in a situation where an inventor, or owner decides to sell their property to a third-party in exchange for paid royalties from revenue the property will make in the future.
When Royalties Aren’t Audited
You’ve probably heard about law suits involving the music industry and unpaid royalties. Many a musician has been allegedly cheated by their managers and record companies who have pocketed money they were owed. What happened to Sly Stone and others shows how complicated lawsuits can become.
However, they can also go the other way, such as the $7 million law suit against Stevie Wonder by his diseased lawyer’s wife. She claims her late husband was promised 6% royalties from Wonder in perpetuity (eternity), and before her husband died she claims her husband bequeathed those rights to her.
Benefits of Licensing and Royalty Audits
For an efficient royalty audit to be carried out, the licensee-licensor relationship also has to be audited. To do this, a good CPA firm uses a thorough process to cross-reference the license agreement terms with royalty accountings to identify any and all discrepancies, such as unpaid royalties.
A Regular Royalty Audit can Thwart Future Litigation
As you can see, a royalty audit is necessary with license agreements. The licensee can rest assured that they’re being paid all the royalties they’re owed; and licensors don’t have to dread being involved in royalty law suits because a payment was missed.
Miller Kaplan Arase LLP works with corporates across the United States to provide multinational companies and mom-and-pop operations alike with cost-effective royalty audit and other financial services.
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