Royalty Audit Notice Due Dates: 2025

  

If your client's accountings are due 90 days following the end of the semiannual period ended December 31, 2024, in most cases, your client will need to issue notices of both audit and objection prior to March 31, 2025 in order to reserve your client's right to audit his/her/its 2021 H2 statement.  Confusing? Yes, it is very confusing!

Likewise, notices specific objections to statements issued for the period ended June 30, 2022 must be issued by September 28, 2025.

Call my firm Boschan Corp. for help at (424) 248-8866 or learn more about our royalty audits by clicking here. Please do not wait until March, not least because your client's rights could expire sooner, depending on the relevant contractual language and statutes.

Intro to Royalty Audits: Who Has Royalty Audit Rights and Against Whom?

Formally referred to as "royalty examinations," royalty audits are essential for companies and individuals earning significant royalties on intellectual property (IP) such as music, film, publishing, trademarks, trade secrets, and patents. They identify underpayments or other areas of non-compliance by a licensee or business partner (a "counterparty"), usually focusing primarily on ascertaining whether a rightsholder suffered damages due to incorrect royalty calculations (e.g., identifying underreported revenues, incorrect charges and deductions, and incorrect royalty rates). This post is an overview of who has audit rights, who is on the hook for an audit, and who can conduct an audit.

Royalty Audit Rights Holders:

Usually audit rights are a deal point included in many contractual agreements between a rightsholder and a counterparty.  (Here is a link to more on such audit provision deal points.)

However, certain audit rights are not contractual, but statutory (i.e., provided for by law).  For example in the United States music industry, there are a variety of legislated royalty audit rights on the Federal level (e.g., rights to audit the Mechanical Licensing Collective (MLC)), and in California, recording artists have a statutory audit right. Native American Indian Tribal gas and oil royalty audit rights are another statutory example.

With no contractual or statutory audit right, a rightsholder's options to hold a counterparty accountable may be limited. However, it does not necessarily mean that no audit is possible. As a royalty auditor, legal counsel and I often negotiate with counterparties the terms of audits, to optimize our clients' rights. In summary, there is no law against a rightsholder requesting an audit, even if its contract is silent on audit rights. 

Further, although extensive audits normally require the cooperation of counterparties, there is a spectrum of depth in auditing. Often, meaningful audit analysis can be accomplished more superficially and/or unilaterally, without the cooperation of a counterparty. Therefore, even if a counterparty refuses to grant a rightsholder audit rights, it may be possible to complete certain audit procedures even without an agreement between the parties.

Examples of royalty audit rights holders include:

• Actors
• Agents (may not have direct audit rights but they are stakeholders in successful client outcomes and can be instrumental in organizing client audits in TV, Games and filmed entertainment)
• Artists
• Authors
• Celebrities
• Collection Societies
• Collectives
• Composers
• Consortiums holding IP rights
• Creators
• Designers
• Developers
• Directors
• Engineers
• Ex-Spouses
• Filmmakers
• Film studios
• Heirs
• Inventors
• Investors
• Landlords (who charge "percentage rent")
• Licensors
• Mixers
• Owners of land with natural resources (e.g., oil and gas)
• Photographers
• Producers
• Publishers
• Record Companies
• Rights Societies
• Screenwriters
• Songwriters
• Talent Managers and other Reps
• Unions
• Writers
  

...And any party who acquires such rights from the original rightsholder.  For a longer list by industry, and a bit more detail about how audit rights can be gained by such parties, please click here.

Counterparties Subject to Royalty Audits:

Royalty audits apply to parties who are legally or contractually obligated to pay royalties, with each industry presenting unique audit dynamics. Generally, those directly responsible for calculating and paying royalties are the most likely audit targets. However, the entity paying royalties isn’t always the one the rightsholder has a direct right to audit. For example, in the recorded music industry, producers often receive payments from record labels but have audit rights only over the artists who hired them, not the record companies themselves. In cases like this, rightsholders may need to seek creative solutions or legal counsel to obtain insights or negotiate access to the necessary financial records.

Refusals to cooperate with royalty audits, though allowed under some circumstances, can often lead to friction and closer scrutiny. Some parties attempt to restrict access by citing confidentiality or limiting the audit scope based on contract terms, such as granting access only to internal reports rather than full source documentation. In such cases, nondisclosure agreements might ease confidentiality concerns, while honoring the audit request, although this topic is best addressed in a separate post. 

Examples of parties who must defend royalty and similar audits include:

• Advertising agencies and platforms (audited by advertisers)
• Agents (audited by clients for packaging fees)
• Artists (audited by producers)
• Collection Societies (audited by publishers and writers)
• Concert Promoters (audited by live entertainers)
• Consortiums holding IP rights (audited by stakeholders such as universities)
• Ex-Spouses (audited by ex-spouses)
• Film studios (audited by talent and production companies)
• Influencers (audited by marketers and commission-based affiliates)
• Commercial real estate tenants (audited by landlords who charge "percentage rent")
• Licensors (audited by licensees; many examples listed above and below)
• Merchandise companies and trademark licensees such as fragrance companies
• Oil and gas companies (audited by landowners)
• Photography libraries and resellers (audited by photographers)
• Producers & Production Companies (audited by talent including writers)
• Publishers (audited by writers, composers, game developers)
• Record Companies (audited by recording artists, unions, and music publishers)
• Retailers (audited by influencers and commission-based affiliates)
• Rights Societies (audited by members)
• Streaming services (audited by rights collectives and other licensors)
• Touring artists (audited by record companies and other % reps)
• Unions (audited by members)

For more details and nuance on the topic of what parties can be audited, visit my lengthier blog post here.

Who Conducts Royalty Audits?

My firm, Boschan Corp., is a royalty audit service provider. Legal counsel for IP owners hire forensic accountants or royalty audit specialists such as Boschan Corp. with experience in industry-specific IP rights to conduct - or defend - audits. 

Therefore, it is unfortunate that most of the boilerplate audit provisions - including those in recently passed legislation - have not changed much since the early 1900s and most not only do not provide for sufficient documentation to be provided, but also mandate that the auditor be a CPA (Certified Public Accountant) or Chartered Accountant. While the CPA and Chartered Accountant licenses are hard earned achievements, in reality, they represent specialized credentials that are not necessary - or even relevant - for many of the analytical, digital and quantitative procedures that a modern royalty audit requires.

In summary, CPAs performing financial audits in the U.S. attest to their clients' adherence to Generally Accepted Accounting Principles (GAAP), while royalty auditors - such as those at my firm - examine the compliance of adverse parties with legal agreements and statutes, using standards and methodologies specific to each case. Thus, the goals and methods of each audit diverge significantly, as does the relationship between the auditor and the entity being audited.

Though my firm of professional accountants indeed has some CPAs on staff, our work spans highly specialized areas which require advanced expertise not covered by the CPA certification, nor by additional fraud certifications such as the CFF (Certified in Financial Forensics) or CFE (Certified Fraud Examiner).

Instead, royalty audits demand deep knowledge of financial, industry business practices, and legal frameworks, especially as they pertain to intellectual property and industry-specific financial structures.

Consequently, while some forensic accountants (including some of our own team members) maintain CPA credentials, many do not, as they find little value in keeping a license unrelated to their field of practice. In fact, CPAs who transition fully to royalty auditing, royalty accounting, or IP valuation and damages often allow their CPA licenses to lapse, recognizing that their work operates within a distinct area of expertise. Despite claims by various credentialing bodies, forensic accounting in IP valuation and royalty analysis remains without a certification that truly represents the unique skills and knowledge required for the field.

In summary, the absence of a standardized certification in our niche reflects the specialized skills and nuanced understanding needed to succeed in this type of forensic accounting, underscoring that the CPA credential—while esteemed—is not the definitive qualification for all accounting practices, especially those tied to legal and intellectual property expertise.

I encourage transactional attorneys to avail themselves of my firms' agreement redline consulting services to help suggest more favorable language to your audit provisions in order to give your client more control over the audit process, especially with respect to selecting or limiting potential royalty audit service providers.

Who Can Audit? Navigating Contractual, Statutory, and Negotiated Royalty Audit Rights

Audit rights are critical for ensuring transparency and accountability in royalty agreements. These rights, often negotiated into contracts, allow rightsholders to examine a counterparty’s records to verify that royalty payments are accurate and aligned with the agreed terms. 

This post has two sections:

• Examples of Parties with Audit Rights
• Discussion of How Audit Rights are Gained
  
  

Who Has Audit Rights?

Here’s a list of examples various types of royalty audit rights holders across a range of industries:

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1. Music and Entertainment Industry

• Songwriters

• Composers

• Music publishers

• Recording artists

• Record labels

• Performing rights organizations (PROs) like ASCAP, BMI, and SESAC

• Film and TV composers

• Film production companies

• Movie studios

• Streaming service content providers

• Background musicians and vocalists

• Collecting societies (e.g., SoundExchange)
  
  

2. Publishing Industry

• Book authors

• Illustrators

• Literary agents

• Book publishers

• Academic authors

• Journal editors

• Digital textbook publishers

• News syndicates

• Magazine publishers

• Scriptwriters

• Photographers and visual artists in published works
  
  

3. Technology and Software

• Software developers

• Application developers

• Software licensing firms

• IT services companies (for SaaS or software-as-a-service products)

• Gaming studios (for video game licensing)

• Patent holders in tech (e.g., for software algorithms or hardware designs)

• Semiconductor companies (licensing chip designs)
  
  

4. Pharmaceuticals and Biotech

• Drug inventors

• Pharmaceutical companies (patent holders for drugs or processes)

• Research institutions (for technology transfer or licensed patents)

• Biotech firms with patented genetic material or methods

• Hospitals and universities (for clinical trial IP)
  
  

5. Media and Broadcasting

• Television production companies

• Radio show creators

• Cable network owners

• Satellite radio companies

• Podcast creators

• News syndicates

• Digital news aggregators (for content syndication royalties)

• Online video creators (licensed content on streaming platforms)
  
  

6. Consumer Products and Brands

• Brand owners (for licensed brand use)

• Trademark holders

• Franchise owners (for brand usage royalties)

• Apparel companies (licensed designs or branding)

• Cosmetic companies (licensed formulas or trademarks)

• Toy companies (for IP associated with licensed characters)
  
  

7. Manufacturing and Engineering

• Machinery patent holders (for specialized equipment)

• Industrial process licensors

• Engineering design firms (licensed designs)

• Industrial design patent holders

• Licensing firms for manufacturing patents
  
  

8. Agriculture and Biotechnology

• Seed developers and patent holders (e.g., genetically modified organisms)

• Agricultural equipment designers

• Fertilizer or pesticide formula patent holders

• Agricultural research companies (technology transfer licensing)
  
  

9. Sports and Gaming

• Professional athletes (for licensed name/image/likeness usage)

• Sports leagues (for broadcast and merchandise rights)

• Video game athletes and personalities (for in-game likeness royalties)

• Fantasy sports platforms

• eSports organizations and players (name, brand, or likeness royalties)
  
  

10. Fine Art and Design

• Visual artists (royalties for print sales or digital reproduction)

• Graphic designers (licensed artwork)

• Fashion designers (licensed apparel or accessories)

• Sculptors and painters (for public installations or limited reproductions)

• Art foundations (for posthumous licensing of works)
  
  

11. Education and Non-Profit Sector

• Universities and colleges (for licensed research IP)

• Academic journal authors and researchers

• Educational content creators (for textbook or online course royalties)

• Non-profit organizations (for branded materials or research patents)
  
  

12. Energy and Utilities

• Oil and gas patent holders

• Renewable energy patent holders (e.g., solar or wind technology)

• Utility companies (licensed technology for infrastructure)
  
  

13. Fashion and Apparel

• Fashion designers

• Textile manufacturers (for licensed patterns or designs)

• Footwear designers (licensed technology in sportswear or casual shoes)
  
  

14. Automotive and Transportation

• Automotive companies (for patented engine designs or features)

• Electric vehicle (EV) technology patent holders

• Automotive component suppliers (e.g., patented airbags, sensors)

• Transportation infrastructure licensors (e.g., specialized railway tech)

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How are Audit Rights are Gained?

There are five ways to gain audit rights:

1. Contractual
2. Statutory
3. Negotiated
4. Unilateral
5. Imposed via Litigation

• Contractual and Statutory: When a contract includes audit provisions, these clauses are usually detailed and specifically crafted to outline the extent, frequency, and scope of a royalty compliance examination (also known as a "royalty audit"). However, audit rights are not always contractual; in some cases, they’re statutory, meaning they’re provided for by law.
  
  In the United States music industry, for example, certain statutory audit rights are established to safeguard artists and rights owners. On the federal level, legislation grants rights to audit organizations such as the Mechanical Licensing Collective (MLC), which collects and distributes mechanical royalties. California offers another layer of protection by granting recording artists a statutory audit right, ensuring that they can confirm the accuracy of their royalty payments. These statutory rights provide a layer of protection that exists independently of any contract, giving rightsholders a clear, legally-backed path to seek transparency and accountability.
  
  
• Negotiated: But what if there’s neither a contractual nor a statutory royalty audit right? For some rightsholders, the absence of explicit audit rights can seem like a significant obstacle to verifying the accuracy of royalty payments. However, the lack of a formal right doesn’t automatically prevent an audit. In my work as a royalty auditor, alongside client legal counsel, I often negotiate terms with counterparties to secure audits for clients, even in the absence of clear contractual or statutory rights. This negotiation process is particularly valuable, as it allows both parties to agree on terms that can ultimately clarify and verify royalty flows while maintaining good business relations.
  
  Additionally, it’s worth noting that a rightsholder can always request a royalty audit, regardless of the contractual provisions - or lack thereof. While the counterparty is under no legal obligation to comply without an audit clause, initiating this conversation can sometimes lead to an agreement on audit terms. The willingness of a counterparty to cooperate can be influenced by various factors, including their desire to maintain a strong working relationship with the rightsholder, avoid future disputes, or set a standard of transparency. In some cases, the audit request itself demonstrates a rightsholder’s commitment to thorough oversight, which can encourage cooperation.
  
  
• Unilateral: When full cooperation is not possible, a royalty audit can still be pursued to some degree. There is a spectrum in the depth of audit work that can be performed, and some meaningful analysis can be accomplished with limited data. Audits may range from comprehensive, detailed investigations - often requiring full access to the counterparty’s financial records and systems - to more limited, targeted analyses based on available data or public information. For instance, if a counterparty declines to cooperate, a rightsholder may conduct an independent analysis using secondary sources, such as third-party sales data, market reports, or other relevant metrics. Although this approach doesn’t provide the full assurance of a cooperative audit, it can still offer valuable insights.
  
  This spectrum of auditing options highlights the flexibility available to rightsholders in verifying royalties. Even if a counterparty refuses to provide documentation, some audit techniques can be applied unilaterally. For instance, digital tools and analytical software can identify potential discrepancies in reported royalties by analyzing trends in sales, streaming, or usage data available from third parties. While these unilateral audits (sometimes known as "desk audits") may not be as exhaustive, they serve as a viable method for spotting irregularities and potentially initiating further discussions with the counterparty.
  
  
• Imposed via Litigation: While most royalty audits are completed and settled without litigation, and some enter litigation in order to achieve resolution on royalty audit claims, from time to time as auditors, we conduct audits within the context of ongoing litigation, where we obtain records through subpoenas and document production and serve as expert witnesses at trial or arbitration. Clients do this when the counterparty is uncooperative, but it can be much more expensive than completing and settling an audit pursuant to contractual provisions out-of-court.

Ultimately, the pursuit of a royalty audit - whether it’s contractual, statutory, negotiated, unilateral, or in the context of litigation - plays an essential role in protecting a rightsholder’s interests. Clear, enforceable audit rights offer the strongest security, but even without them, there are practical methods to achieve oversight and transparency. 

If you are interested in auditing a counterparty - or find yourself defending an audit from a rightsholder - please start by calling my firm at (424) 248-8866 or messaging us here to run a conflict check, so that we can discuss what approach best empowers you or your client.

Who’s On the Hook for a Royalty Audit? A Look at Who Can (and Can't) Be Audited, and What Refusing to Cooperate Really Means for Relationships

When it comes to royalty audits, who can be audited is often clear-cut - but who holds the keys to the documents, and what happens if those doors stay closed, is another matter. Entities bound by contractual or statutory obligations to pay royalties are the most obvious targets for royalty audits, but sometimes the party holding the purse strings isn’t the same one a rightsholder can audit. In the recorded music industry, for instance, producers are usually paid directly by an artist’s record company, yet the standard audit rights granted to producers include only the right to audit the artist, not the record label that’s calculating and issuing the payments. For a producer, learning that they don’t have direct access to their income source can be frustrating. However, there are strategies to gain more complete audit rights - particularly for music producers - so it’s wise to consult counsel before concluding that an audit is off-limits.

If you’re lucky enough to have audit rights in your contract, this can give you a valuable avenue to verify royalty payments, but some audited parties might not comply eagerly. They may delay or attempt to restrict the audit’s scope. Here, it’s important to understand the impact of such actions on business relationships. Contrary to the widespread myth that exercising audit rights damages the relationship, this is rarely the case. Often, it has no effect at all. In fact, if there’s a solid working relationship in place, it can actually strengthen trust and transparency, showing that both parties take accountability seriously. Audits usually only strain relationships when other unresolved issues are already at play.

A counterparty who refuses to provide access to certain documents might have legal ground to do so, especially if the audit request exceeds the contract’s defined scope. Some contracts specifically limit the frequency, scope, or type of documents that can be reviewed, allowing the counterparty to challenge requests for anything outside these boundaries. However, while such refusals are sometimes justifiable, they can be shortsighted - an unwillingness to cooperate can signal potential issues that may actually damage the counterparty’s reputation more than the rightsholder’s.

Confidentiality is often cited as a reason to restrict access. For example, some parties may insist on sharing only summaries rather than full financial documents, claiming confidentiality concerns. This tactic can create friction, yet most rightsholders understand confidentiality obligations and will comply with reasonable nondisclosure agreements. Moreover, audit provisions are frequently designed to ensure that sensitive information is protected. By leveraging these protections, an audited party can ease concerns about data security while still demonstrating cooperation.

Another common strategy among counterparties is to impose timing restrictions. For instance, many contracts allow audits only once every year or two, typically giving the rightsholder access only to recent records. Such limits are often used to prevent overreach and reduce the administrative burden on the counterparty. Additionally, some contracts require prior notice of an audit request - sometimes months in advance - which may deter impulsive requests while still allowing time to prepare.

If you’re a rightsholder, consider that a refusal to cooperate might not end the audit entirely. Many meaningful audit procedures can be completed without full cooperation. Independent analyses, or “unilateral audits,” can examine public or third-party data to gauge whether reported royalties seem accurate. This type of analysis, while not as exhaustive as a cooperative audit, can still identify discrepancies that might encourage further dialogue.

For those without explicit audit rights, it’s always worth asking, as sometimes even unentitled parties may agree to a limited review. In the music industry, for instance, a producer might not have the right to audit a record label directly, but could potentially negotiate limited audit rights through the artist or explore indirect ways of ensuring fair royalties. This approach requires creativity and, often, the input of legal counsel to navigate non-standard situations.

Examples of Royalty Audit Counterparties by Industry:

1. Music and Entertainment

   • Record labels (audited by artists)
   • Music publishers (audited by songwriters)
   • Streaming services (audited by performing rights organizations)

2. Publishing

   • Book publishers (audited by authors)
   • News organizations (audited by freelance journalists)

3. Technology

   • Software licensors (audited by licensees)
   • App developers (audited by platform hosts)

4. Biotech and Pharma

   • Patent licensees (audited by patent holders)
   • Research partners (audited by academic institutions)

5. Consumer Goods

   • Franchisees (audited by franchisors)
   • Apparel manufacturers (audited by brand owners)

6. Gaming and Digital Media

   • Game publishers (audited by game developers)
   • Ad revenue partners (audited by content creators)

7. Energy

   • Solar tech licensees (audited by patent holders)
   • Oil companies (audited by landowners)

8. Sports

   • League merchandise partners (audited by athletes)
   • Broadcasters (audited by leagues)

By using audits effectively and respecting the boundaries of each party’s rights, rightsholders and counterparties alike can create a working relationship built on transparency and mutual trust. When conducted thoughtfully, audits not only ensure accurate royalty payments but reinforce confidence, setting the stage for long-term, cooperative partnerships.

How Long Does a Royalty Audit Take?

Too Long!

Good and true royalty audits take greater than one year to complete and settle. Only once in a great while is an audit opened and closed in less than a year.

Why so long?

• We must wait in the queue at various counterparties - it can take us longer than six months to commence an audit (previously known as "fieldwork")
• It can take us six months to two years to complete an audit because of a multitude of factors beyond our control (warehouse fires, anyone?)
• It can take over six months to receive an initial audit response - again, there is a queue
• Settlement discussions can take another six months or longer - it takes time and money for the parties to reach agreement
• If the parties don't settle, litigation can take years and cost a fortune, so more commonly settlement talks and tolling agreements are extended and the parties take their time to settle

In other words, do not hang your hat on an inflexible timetable for your audit and do hire an attorney who is an expert in tolling agreements to preserve your rights. Please ask if you need a referral to such legal counsel.

In summary, there are tactics to expedite audits, but in general, audits take too long.

Upcoming Audit and Objection Notice Deadlines for P.E. 12/31

Attn. Counsel:

Wait not until March to enlist our assistance. Gratitude from your auditors, Boschan Corp. (424) 248-8866

The Royalty Audit: A Legal & Financial Concern

A “royalty audit” is more accurately described as a contract compliance examination, or a "contract audit." Thus, in four of five cases, the call to do a contract audit is made by a client's attorney, not its finance team.

Even in the infrequent cases when the call comes from a non-attorney, we like to involve an attorney if the client is willing to pay for it because we usually need a tolling agreement and our contract audits basically seek to quantify amounts due in connection with legal issues, so it helps to have an attorney available to consult as matters arise and in order to facilitate a settlement agreement or, rarely, file a legal complaint. Accordingly, our royalty and other contract audit work is actually expert consulting work that is a subset of our “forensic accounting” practice, all of which is for a legal purpose.

On the other hand, some attorneys see us as pure bean counters and if a client’s motivation for auditing a business partner is purely financial and it isn’t interested in paying us or an attorney to identify all breaches of the contract, just the accounting provisions, our work focuses as much as possible solely on the financial aspects of their contract.

Even in this case, a contract audit is unlike a financial audit that audits compliance with GAAP (aka an “assurance audit”), which Green Hasson Janks also performs.

One fundamental difference between an “assurance audit” and the contract audits we do: the client.  For example, if we perform a financial audit of a game publisher, the game publisher is our client. If we perform a contract audit of a game publisher, our client is typically a developer or other creator or licensor, not the game publisher, and the publisher is a counterparty to whom we are adverse.

Best of Last Week from The Auditrix

• 7 qualities of addictive games
• California Copyright Conference's "Are You Getting Paid? Best Practices for Unmatched Royalties" panel discussion, which I recapped here.

#IRespectMusic at the California Copyright Conference

• Why most people aren’t downloading apps anymore - Quartz

• UMG earns a "‘listener hour guarantee,’ which they know is going to up their compensation by about 40% — since it’s per listener hour, not per track, the artist gets screwed because it’s not attributable to a track, so the artist doesn't get a royalty." - Per Rich Bengloff of A2IM
• 30 years of the #music #industry in 30 seconds | Geek-Cetera
• Per @schuylermmoore 506 offerings are outside of #state #laws
  #crowdfunding @BHBA_EntLaw 

• Your Music #crowdfunding article by omarshamout (featuring quotes from me) - @LABJcommunity

• Six Strikes plan to eliminate piracy finally operating at ‘full capacity’
• What I spoke about last week to #business #managers: