How can you determine the scope of a royalty audit?

1 Why scope matters

The scope of a royalty audit is important because it affects the cost, duration, and outcome of the audit. A broader scope means that you will cover more sources, periods, territories, and types of royalties in your audit, but it also means that you will incur higher fees, spend more time, and face more challenges in obtaining and analyzing the data. A narrower scope means that you will focus on specific areas of concern or interest in your audit, but it also means that you may miss some potential issues or opportunities in other areas. Therefore, you need to balance the benefits and risks of different scope options and choose the one that best suits your goals and budget.

2 How to define scope

When defining the scope of a royalty audit, there is no single formula to follow as it depends on various factors. However, some general steps can be taken to determine the scope. Start by reviewing your contracts and agreements to understand your audit rights, obligations, and limitations. Then analyze your royalty statements and compare them with expectations, benchmarks, and industry standards. Identify any discrepancies or anomalies that may indicate underpayments or errors. After that, prioritize the sources, periods, territories, and types of royalties that have the highest potential for recovery or improvement. Finally, consult with a professional royalty auditor who has the expertise to conduct the audit. A royalty auditor can help you assess the feasibility and profitability of the audit, negotiate terms with entities that owe you royalties, perform the audit and report findings and recommendations.

3 What to expect

Once you have determined the scope of a royalty audit, the auditor will send a notice of audit to the entities that owe you royalties, informing them of the scope, date, and location of the audit. The entities will respond to the notice, either agreeing or disagreeing with the scope and providing or denying access to records and documents. If there is any disagreement, the parties will try to resolve it through negotiation, mediation, arbitration, or litigation. The auditor will conduct the audit on-site or remotely depending on the scope and access to documents. They will examine, verify, and reconcile accounting records and contracts of the entities that owe you royalties as well as compare them with royalty statements. Afterward, they will prepare and deliver an audit report that summarizes findings and quantifies any underpayments or errors that may affect your earnings. Lastly, you will review the report and decide whether to accept, reject, or negotiate its findings as well as pursue any recovery or improvement actions. If there is any dispute, it can be resolved through negotiation, mediation, arbitration, or litigation.

4 How to benefit

A royalty audit can be highly beneficial to you in many ways. Recovering any underpayments, errors, or breaches of contract can be done through voluntary payments, settlements, or judgments. Your royalty income can also be improved by renegotiating contracts, adjusting royalty rates, or optimizing royalty allocations or classifications. Furthermore, this audit can help enhance your royalty management by updating records, streamlining processes, or implementing best practices. Lastly, it can help strengthen your royalty relationships by clarifying expectations, resolving disputes, and building trust and cooperation.

5 How to prepare

A royalty audit can be a complex process, so it's important to prepare yourself and your team. Gather and organize contracts, agreements, royalty statements, and other relevant records. Identify and communicate your goals, expectations, and concerns for the audit. Make sure to choose a reputable and qualified royalty auditor who can represent your interests. Be ready to act on the audit report and follow up on any recovery or improvement actions. Be proactive, assertive, and flexible in pursuing your desired outcomes. By taking the right steps to prepare for a royalty audit, you can ensure that you get the best possible results.