What is a Royalty Audit and Who Needs One?

A royalty audit is a way of ensuring that organisations are paying royalties correctly and in accordance with their contractual agreement.

The audit investigates various obligations, with a focus on the financial terms and considerations that were previously agreed to – including the sales that are within the scope of the agreement and the frequency with which payments are made.

Who needs a royalty audit?

Royalty audits can be performed in any industry where renumeration is offered for the future use of a patented product. Although the concept of royalties is often associated with the arts (such as book sales or public performances), they in fact have a far wider application.

For instance, royalties are common when patenting technology, with merchandising and with data supply. Any organisation that’s engaged in a licensing or patent agreement could be subject to royalty payments and are therefore subject to audits.

There are several reasons why an audit could be necessary. The first, and most obvious, is to ensure that a licensee is reporting royalties correctly and paying out as they should. Failure to do so can happen for countless reasons, including:

  • Intentional underreporting of royalties owed in an attempt to pay less;
  • Human error resulting in royalties being miscalculated; and
  • A failure to include new products or patents in royalty figures.

With this in mind, one can see that royalty audits also serve as a pre-emptive assurance measure. If organisations know that they could be subject to an audit, they are likely to be more rigorous in their approach to royalty payments.

What is reviewed during a royalty audit?

There are two types of assessment: desk audits and field audits. A desk audit takes place over the course of a few days, with the auditor reviewing the organisation’s documentation and looking specifically at contractual agreements and payment reports.

These can be performed in-person or remotely. Either way, the auditor will assess the sales trend of reported royalties and compare this to the licensee’s financial reporting.

Additionally, the auditor will review changes in the way royalties are reported – assessing both format and content. They will also examine any new ways in which the product or patent is being used.

A field audit is more in-depth, and is designed to identify potential failures in the royalty reporting process.

The audit will check for notable trends in the royalty returns, before performing a full-scope assessment of books and records. This process can take several months, and will culminate in a detailed report of the auditor’s findings.

Who can complete a royalty audit?

There are no legal requirements on who can conduct a royalty audit, but organisations are advised to hire a third-party specialist. This ensures that the assessment is conducted without bias on either side, and it makes it more likely that both the licensor and licensee will accept the final decision.

If you’re looking for someone to provide a royalty audit, DQM GRC is here to help. Our team of experts have extensive experience performing assessments, and understand the need to maintain professional relationships.

We specialise in audits related to the licencing of data to third parties, and with our Royalty Audit service, you can be sure that the organisations you work with are returning the correct royalties in the specified timescale.

We can also ensure that the customers’ use of data is consistent with what is reported to you and that the proper data protection controls are in place.

Author

  • Luke Irwin

    Luke Irwin is a former writer for DQM GRC. He has a master's degree in Critical Theory and Cultural Studies, specialising in aesthetics and technology.

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