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
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)
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.
