Licensors and licensees frequently need an accountant to perform an independent investigation of whether the licensee has complied with payment terms and other provisions of licensing agreements. These investigations, referred to by some as royalty audits but more accurately titled royalty examinations, call for objective investigation of accounting and related information to ascertain a variety of issues that contribute to the ultimate calculation of royalties owed. Relevant issues typically include the following:
- Completeness testing. Have all royalty-bearing sales been reported?
- Evaluation of sales recording and royalty reporting interface and processes. Does the royalty reporting system use the same data as the licensee’s Enterprise Resource Planning accounting system? Do the reported numbers tie to numbers tested by the licensee’s external auditors?
- What products are flagged as royalty-bearing and are there other products or services that might also be treated as royalty bearing, or has there been an erroneous over-inclusion? While Hemming Morse is not a trier of fact, does information available, including contracts, indicate that products have been improperly flagged as royalty-bearing or not?
- Upgrades and maintenance. Have upgrades and maintenance been properly treated in the royalty reporting and payment history?
Hemming Morse professionals have experience on hundreds of royalty examinations and investigations of contract compliance, across several industries, including flash memory, software, manufacturing, music, movies and film, internet businesses and e-commerce, pharmaceuticals, and life science. Having been involved in negotiations of license agreements and setting up contract compliance programs, our team has seen how these agreements have been structured, interpreted, misinterpreted, and renegotiated. Working on behalf of both licensors and licensees, the Hemming Morse team understands the importance of neutrality and objectivity, leaving contractual interpretation and legal conclusions to others, but rather reporting information to assist licensors and licensees in ensuring amounts owed have been properly reported and paid.
In addition, our professionals have testified in court about royalty examinations performed by other professional service firms, including whether the investigations were performed in compliance with applicable professional standards.
Flash Memory License Agreement Royalty Payment Inspection
The Hemming Morse team made an investigation of whether the licensee, a seller of flash memory products, had properly accounted for and paid royalties owed on flash drives and memory, with contractual interpretations defining the amount owed, depending on the size of the device, the type of memory used, whether distributors were involved in the sale, and the country in which the products were sold. The Hemming Morse team provided a menu of options, with the particular amount owed depending on contractual interpretations, including application to products.