Tuesday, September 29, 2015

A Forensic Accountant Does Not a CPA or CFE Make

Beyond navigating all kinds of accounting and record keeping systems, a modern forensic accountant needs the ability to ascertain compliance with relevant regulations and/or contracts and, often, to process terabytes of information using sophisticated database software, plus the ability to communicate findings in a manner in which a layperson can comprehend.

It isn't easy to find an expert who possesses all of the above qualities and when you do, your counterparty will likely endeavor to bar the expert from auditing or testifying.

Some of the strategies to limit a party's top choice of forensic accountant include attempting to:

  • Proactively limit contractually:
    • Who can conduct an audit (e.g., requiring it be a CPA and/or nationally recognized firm, even though the "Big 4" accounting firms are not especially well regarded as royalty audit or forensic accounting experts and many are unwilling to take on such engagements)
    • When an audit can be conducted by your auditor of choice (e.g., certain companies try to prevent the best auditors from conducting more than one audit at a time at any particular company)
  • Reactively attempt to discredit your expert by attempting to equate the term "accountant" with "CPA" (although they are not the same) and frame your accounting expert's credentials solely in terms of CPA certification (or other certification or degree), even if the expert is opining on industry practice or damages calculations (and not a public-accounting-related matter, such as compliance with GAAP).
However, forensic accounting (including royalty auditing) is a private accounting service, not public accounting.  No official certification exists for "forensic accountants" or other forensic experts; neither CPA and/or CFE certifications, nor economics and/or statistics degrees validate that the bearer has the training or experience necessary to succeed in forensic accounting.  Although these and other degrees and certifications can have bearing on the suitability of an expert, depending on the particular case, a "forensic accountant" these qualifications do not alone make.

Modern forensic accounting is really a blend of:

  • Accounting
  • Eeconomics
  • Industry expertise
  • IT
  • language arts
  • Above-average understanding of certain legal concepts

While some CPAs, CFEs and economists have this, the vast majority do not, as I once observed when a highly degreed certified public accountant had a meltdown on the stand when he had to admit during questioning that he had no relevant expertise that pertained to the matter at hand.

Fortunately, the curriculum at the University of Southern California - where I studied under highly respected IP attorneys, accountants and economists - and my decades of work experience focus on all of the above areas, so I am a very well rounded forensic accountant, particularly in the entertainment and IP sectors, where I bring deep industry expertise.

My recommendations for finding the right auditor or forensic accountant for you or your client are to search for someone with a balance of industry expertise and relevant accounting and/or testimony experience.  Request the potential expert's CV, a list of cases in which they have testified and/or participated and client references.  If the potential expert forensic accountant doesn't ask a lot of questions and clear conflicts before learning details of the case, it is a red flag that he or she is inexperienced.

Finally, make sure you discuss your or your client's budget with the expert; a rate sheet alone won't tell you how many hours of work will be required on your case and if you think all you need the forensic accountant to do is spend an hour putting together a spreadsheet and signing a declaration that you drafted, you may be mistaken; although we often need to define the scope of an engagement to meet a budget, a forensic accountant's work is usually a bit more complex than meets the eye, so do not assume you know how much time a particular engagement may take.

Monday, September 21, 2015

Live Music: Is Growth of the Industry's Largest Source of Revenue Sustainable?

Live music is the largest of the music industry's three major revenue streams, representing over 40%:

Accordingly, nearly half of the money that the average U.S. consumer spends on music is for live music experiences.

Over the past few years, the live concert industry has had a good run, globally as well as in the US, as shown in the chart below:

Pollstar reported that North American concert revenues totaled $6.2 billion in 2014 and 2015 may be another record-setting year for live music events, in terms of revenues, attendance and high ticket prices.  Many credit such growth in live music to maturing audiences, as evidenced by trade publication Pollstar’s list of top five concert tours worldwide during the first half of 2015, which includes just one act with fewer than two decades of history (i.e., One Direction):
  1. One Direction
  2. Fleetwood Mac
  3. The Rolling Stones
  4. Garth Brooks
  5. Paul McCartney

There is clearly a risk that the live concert industry (and industries that depend on it, such as pro-audio equipment), will suffer sharp declines as top-grossing entertainers and their audiences age out of the marketplace.

However, it is worth noting that the above list of top five concert tours during the first half of 2015 does not reflect the latest Taylor Swift tour.  Also, it does not reflect non-tour related events such as festivals and electronic dance music events, all of which attract a younger demographic of consumers with lower discretionary income than the typical Fleetwood Mac or Paul McCartney concertgoer, but who are likely to continue to attend music events for decades to come.

Regardless, some analysts believe that, as the over-saturated market for festivals contracts, live music revenues may decline.  Also, while electronic dance music has been a bright spot, notable EDM promoter SFX has struggled financially. 

The bottom line is that few experts think the record growth in live music is sustainable in the long term.