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What is a licensing audit? Like any other audit, it’s all about doing a thorough review of something, in this case licensing. What is licensing? Licensing can pertain to assets like copyrights and trademarks, and licensing agreements can generate a lot of money. When it comes to licensing these things, contracts are drawn up and signed. Over the duration of the license things can change, like how a trademark is being used. It’s important that you have qualified professionals perform a licensing audit periodically, over the course of the agreement period, to ensure that the licensee is adhering to their contractual obligations, and that the licensor is receiving sufficient payments. Circumstances change over time. Things like the nature of a business, the economy, and in this case, the manner in which a copyright or trademark might function. Licensing audits ensure things stay above-board. Who performs these audits? Licensing audits are always performed by accountants or lawyers, depending on the nature of the audit. While you will need an accountant to reconcile things like bank statements and determine the calculations for payments should they change, lawyers are often required to audit or vet signed contracts. In such circumstances it is not uncommon for a lawyer and accountant to work together, but many accountants are experienced in legal accounting, which could may the lawyer irrelevant. What can an audit yield? On a good day? More money. It’s not uncommon for a licensee to underpay the licensor over the course of a contract or agreement. Things like royalty payments can be missed, either intentionally or unintentionally, but it’s the licensing auditor’s duty to find things like this and help recover them. Can an audit be damaging? If both the licensor and licensee are operating as per the terms of an agreement, then no, no one should suffer anything damaging. However, if one side, which is usually the licensee, does not live up to their end of the bargain and they are caught, things can get messy. This is why it is important during the formation of the agreement to ensure that everyone does their due diligence and proper provisions are put in place to ensure payments are made. If the license agreement is solid then any licensing audit that may follow will have zero impact on the relationship between the two parties. Although you may think that an audit that turns up a problem is only bad for the licensee, it’s actually damaging to both parties. While the licensee may lose the use of a copyright or trademark, the licensor loses out on a significant income source. It’s because of this that properly fulfilled agreements are in everyone’s best financial interest. Licensing audits are a necessary part of industries such as apparel, sports, technology, film and music. You see the use of trademarks crossing over to all kinds of different formats, popping up everywhere in unaffiliated situations, all because of licensing agreements. If these agreements are regularly policed by audits, millions of dollars could be lost and infringement suits could be filed. If you are part of a licensing agreement, check into when the last audit was performed. If it’s been a long while, it might be time to call your accountants. Miller Kaplan Arase LLP is a certified public accounting firm specializing in accounting, business management, 401k reporting, financial tax planning, royalty and licensing audit services for individuals, healthcare, media, real estate, food and beverage industries, and tax-exempt organizations worldwide. To know about software licensing audit visit Wikipedia.org.
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