David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence programs, and forensic accounting services in Philadelphia and the Delaware Valley.
Have you or your clients licensed the use of intellectual property in return for royalty fees? Are you or your client’s franchisors who receive franchise fees from your franchisees? If so, are you conducting royalty audits in a timely manner to assure that you are receiving the fees to which you are entitled? If not, it may be time to turn to a forensic accountant to establish regularly scheduled royalty audits and make sure you are getting the royalty checks you deserve.
“Royalty fees are sometimes fixed so that a certain amount is paid each year, but more often, they are based on production, sales or gross profit by the licensees,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. “In those situations, the license agreements allow for royalty audits. The problem is that many licensors fail to conduct royalty audits, or they conduct them long after the fees are due, effectively cheating themselves out of money they are owed.”
Royalty audits are a complex undertaking that generally are not conducted by patent holders, copyright holders, trademark/tradename holders or franchisors, but instead by a trained financial expert such as a Philadelphia forensic accountant with experience in conducting royalty audits for licensed intellectual property or for franchisors, Anderson said. The cost of a royalty audit usually is paid by the licensor, Anderson said. However, many royalty agreements contain provisions that require the licensee(s) to pay for the royalty audit if the audit discovers willful understating of fees due, he said.
A royalty audit is a detailed examination of the licensee’s financial records intended to ensure that the production, sales or gross profit reported by the licensee matches the actual production, sales or gross profit recorded in their financial records, according to Anderson, a forensic accounting expert in Philadelphia who has expertise in royalty audits.
In situations where different license fee rates apply to different types of items, a royalty audit analyzes the licensee’s fee calculations to make certain that the correct rates have been applied, Anderson explained. A royalty audit also examines the licensee’s financial data to make sure it is consistent with that of comparable companies, Anderson said. For example, if a license fee is based on the gross profit of sales of licensed items, the royalty audit will evaluate gross profits reported on comparable sales by comparable companies to determine if the gross profits reported by the licensee are reasonable.
When significant amounts of royalties or multiple licensees are in play, the license holder may require electronic reporting of financial information, said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. That requirement often results in large amounts of information being reported to the licensor and the subsequent need for the royalty auditor to employ specialized software for data analysis, he said.
As a forensic accounting expert in Philadelphia, Anderson recently conducted a royalty audit for a well-known musician whose music was licensed throughout the world in many forms – albums, singles, sheet music and Internet downloads, as well as songs used for commercials, movies and television programs, by cover bands, and by commercial music services, among others. In addition, the royalty rates paid differed by form and licensee, he said.
Much of the financial information was provided in electronic format and involved many thousands of lines of data, according to Anderson, a Philadelphia forensic accountant with expertise in royalty audits. Anderson said he relied on specialized data analysis software to help facilitate the audit, thereby eliminating hundreds of fee hours and significantly reducing the time needed to conduct the audit.
Anderson also noted that a key benefit of royalty audits is the proactive use of audit techniques to regularly monitor licensee compliance and avoid waiting until year end (or beyond) to determine compliance. In the case of the world-famous musician, the routines Anderson developed in the specialized data analysis software were adapted for monthly use. This allowed for regular analysis of financial data, which, in turn, reduced the amount of work required for the year-end royalty audits and allowed for faster reaction to underpayments by licensees.
Regular royalty audits and the proactive analysis of licensee data assures holders of intellectual property licenses and franchisors that their licensees/franchisees are paying royalties/fees at the correct rate and in a timely manner.
If you require the services of a Philadelphia forensic accountant with expertise in royalty audits or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.
